This Week’s Issue P&I 2024-09-23

Multimanager hedge funds looking to allocate to external firms in race for talent

y B LYDIA TOMKIW

Hedge funds are always looking for new investments and one is increasingly gaining steam: allocating to other hedge funds.

While investing in other funds is nothing new for the hedge fund industry, the last few years have brought growth in both the number of funds doing so as well as the number of

Washington

external allocations.

External allocation has echoes of the once dominant hedge fund-offunds industry as well as the standalone seeding firms that gave a previous generation of managers their start.

But these days, it is multimanager hedge funds — a sector that has seen immense growth in recent years and

How Harris and Trump compare on taxes, capital gains and the economy

y B BRIAN CROCE

Voters routinely tell pollsters the economy is their most important issue in the 2024 election. And though there are many dividing lines between the two candidates vying for the U.S. presidency, they notably have vastly different economic visions. Regardless of who wins the White House and which parties control the House and Senate, tax policy will be a major discussion point in Washington next year as many of the provisions in the Republican’s 2017 Tax Cut and Jobs Act expire in 2025.  Whether those provisions should be extended, amended or be allowed to lapse, and how — if at all — a package should be paid for will be hotly debated.

On the campaign trail, both Vice President Kamala Harris

In this report

■ For a list of the largest hedge funds, see Page 19

■ Hedge funds diving into private credit. Page 18

■ Dmitry Balyasny looks back, and forward. Page 20

■ For the full report, go to PIonline.com/ hedgefunds2024

Pension Funds

U.S. equities drive robust returns for public pensions

Median return of 9.9% makes second straight year of impressive gains

y B ROB KOZLOWSKI

U.S. public pension funds chalked up a second straight year of positive returns for the fiscal year ended June 30, with half posting double-digit numbers despite a somewhat muted bond market and continuing challenges in private markets.

While experts said this was all good news, the dominance of U.S. equities has left them having to convince some public pension fund board members that diversification is still important.

The median return was 9.9% among the 64 pension funds with more than $1 billion in assets whose results had been tracked by Pensions & Investments as of Sept. 16. The median return among plans tracked by P&I the previous fiscal year was 7.6%.

For the most recent fiscal year, every tracked pension fund reported positive returns — with a range

y B PALASH GHOSH

of 5.9% to 14.5% — and those with greater exposure to public equities and lesser exposure to private markets posted the most impressive numbers, continuing a trend from the prior fiscal year. It was even a more impressive year than fiscal year 2023 when pension funds recovered strongly from an anemic fiscal year 2022 that saw negative returns across the board. Returns for the fiscal year ended June 30, 2023, ranged from 2.2% to 11.9%.

A few weeks after the National Football League invited private equity firms to purchase passive stakes in their teams, a very different sport across the pond said it's planning something similar.

While largely unknown in the U.S., cricket is the second most popular sport in the world behind only soccer, boasting at least 2.5 billion fans, according to the World Atlas. That dwarfs the popularity of such U.S. sports as basketball (800 million fans) and baseball (500 million).

Now private equity firms may compete into the medieval sport which is thought to have originated in Britain and is played throughout South Asia, the Caribbean, South

Women execs paying it forward Honorees from the 2024 class of Influential Women in Institutional Investing are dedicated to their mentorship duties.

3

MARKETS LEAD WAY: Wilshire Advisors’ Thomas Toth

IN THIS ISSUE

Alternatives

Canadian pension funds are going big in infrastructure investing. Page 6

In its latest move in private markets, BlackRock has created a new private credit division Page 6

Hedge Funds

Singapore’s GIC and Bridgewater Associates looked at important issues ahead. Page 23

Real Estate

Barings’ John Ockerbloom says buyers and sellers still can’t agree on pricing Page 4

Special Report: Hedge Funds

Hedge funds are diving deeper into private credit. Page 18

Dmitry Balyasny mulls lessons learned over the last 23 years, and what’s ahead. Page 20

Three P&I surveys are now in progress

P&I’s annual survey of investment management consultants is underway with responses due by Oct. 11. Firms providing investment advice and related services to institutional investors are eligible to participate. Results will run Nov. 18.

Responses to P&I’s annual survey of index mangers are due by Sept. 27. Firms managing index strategies, including passive, enhanced, ETFs/ETNs and factor based for U.S. institutional, tax-exempt investors are eligible to participate. Results will run Nov. 4.

P&I is accepting late responses to the annual survey of defined contribution strategies . Firms managing proprietary mutual funds, ETFs or target-date strategies for U.S. institutional, tax-exempt DC plans are eligible to participate. Results will run Oct. 21.

To request a survey or obtain further information, please contact Anthony Scuderi at ascuderi@pionline.com or 212-210-0140, or visit www. pionline.com/section/surveys

New CalPERS CIO talks private markets, returns

The increased allocation was by boosting private equity by 4 percentage points to 17% and private debt by 3 percentage points to 8% at the expense of public equity and public fixed income.

CalPERS officials plan to “gradually increase” the $519.9 billion pension fund’s exposure to private markets to its new 40% target allocation from its actual investment of 30% as of June 30, said Stephen Gilmore, the new CIO, at a Sept. 16 investment committee meeting.

The California Public Employees’ Retirement System, Sacramento, adopted the new allocation in March, four months before Gilmore joined as CIO. The allocation increased private markets exposure to 40% from its former 33% target.

Increasing CalPERS private markets exposure will give the fund a wider range of the investable markets but less liquidity, he said.

Gilmore also said that one of CalPERS’ relative advantage in the private markets is because it had made fewer commitments than its peers.

“And that actually gives us an opportunity to get access to high quality funds and maybe to negotiate better terms and conditions,” he said.

During a presentation, Gilmore spoke about the pension fund’s fiscal year returns which fell below its benchmark for the one, 10 and 20-

year periods ended June 30.

He said that the reason for the  underperformance, 9.3% for the year ended June 30 below its 10.3% benchmark, was that private equity was no match for the “very strong performance of the equity market ... where you’ve seen the large cap tech stocks do phenomenally well and you’ll find a lot of our peers and others lag benchmarks because of that.”

Private equity underperformed its public market benchmark in all time periods including the 10 and 20-year periods ending June 30 with a net annualized 11% com-

The retirement savings gap can only be improved by addressing the gaps in access, saving and guaranteed income, said Thasunda Brown Duckett, president and CEO of TIAA, in her closing keynote at the 2024 Influential Women in Institutional Investing Conference in Chicago.

Duckett said the problems we are trying to solve include the fact that every day 11,000 Americans are reaching their retirement age and yet there’s a $4 trillion retirement savings gap.

“First, we have an access gap,” said Duckett. “Fifty-seven million Americans do not have access to a workplace plan and disproportionately that will be women and people of color.”

“Secondly, we know there is a

savings gap,” she said. “People are not saving enough in accumulation. One of things we can do is continue to ensure that workplace plans offer auto enrollment and auto escalation.”

“Lastly, there’s a guarantee gap in this county,” she said. People are living longer, creating more longevity risk, and Social Security is under pressure. Duckett also mentioned that the last time the U.S. had the level of inflation it has had the past several years, it was the 1970s and at that time, 70% of Americans had access to a pension plan, while today that has plummeted to 12%.

Addressing the gaps will take public and private partnership, she said.

“When it comes to a secure retirement, it’s been one where we as an industry, we have been able

pared to its 11.6% benchmark and net annualized 12.1% vs 13.5% benchmark.

“I expect that (private equity) will recover somewhat over time,” Gilmore said. “We’ve already seen that with the large tech stocks giving up some ground.”

CalPERS is continuing to expand its exposure to active investments with a net $17 billion of new asset deployments across public strategies.

Active management requires patience, said Simiso Nzima, managing investment director, global equity at the investment committee

Sports investing has boomed in the last few years, and one of those leading the charge is Ian Charles, co-founder and co-managing partner of the $10.7 billion Arctos Partners, a firm that raised over $4 billion this year for its now-closed Arctos Sports Partners Fund II.

Pension funds and other institutional investors in the fund included Kentucky Public Pensions Authority, Maryland State Retirement & Pension System, Mutual of Omaha Insurance, Oregon Public Employees Retirement System and University of Texas Investment Management Co., according to P&I and PitchBook data.

Pensions & Investments sat down with Charles for one of his first interviews coming just as the National Football League announced it provisionally will allow certain private equity firms to invest up to 10% in teams’ ownership. Arctos is among those firms, as well as Blackstone, Carlyle

Both candidates vow to protect Social Security, but details are sparse

GOP promises no cuts, while Dems say no to privatization

As the 2024 presidential election gets closer, the candidates have started to hone in on their key issues and campaign promises, one of which is Social Security.

Though they disagree on a variety of topics, both former President Donald Trump and Vice President Kamala Harris have vowed to protect Social Security.

Alicia Munnell, director of the Center for Retirement Research at Boston College, chalked that up to Social Security being “probably the most popular program in the United States.”

Some 87% of Americans agree that Social Security “should remain a priority for our country no matter how bad budget deficits get,” according to a July report from the National Institute on Retirement Security. The report also found that 90% of Democrats, 86% of Republicans and 88% of independents agree with that statement.

However, if Congress doesn’t act, Social Security’s combined trust fund reserves are projected to face depletion in 2035, according to the Social Security Board of Trustees’ annual report.

Social Security has two trust funds: one for retirees and their families, and one for disabled workers and their families. The trust fund for retirees and their families faces a depletion deadline of 2033, at which point the fund's income could only pay 79% of its sched-

After studying economics at what is now Simmons University, Krissy Pelletier “was lucky to work with a great mentor (and) portfolio manager” on the public market side of Wellington Management. She still remembers the words said by Michael Carmen to set the tone going forward on her first day as an administrative assistant.

“He said, ‘Krissy, you didn’t go to Simmons to get this great degree simply to be an administrative assistant. So tell me, what brought you to Wellington? What made you interested? Let’s talk about what I do and how we can work together.’ He wanted to see me succeed. He was interested in what I wanted to be a part of,” Pelletier said.  She would leave Wellington in 2006 as a stock-focused research associate, but Carmen, who is still at the $1.25

uled benefits, the report found.

“I actually don't think we're going to get much done (to prevent this) until 2030,” when the deadline is too close to ignore, according to Munnell.

GOP, Democratic platforms

The 2024 Republican platform promises to “fight for and protect Social Security and Medicare with no cuts, including no changes to the retirement age,” but doesn’t specify how

Private DC plan savers relying on equities

it will fund the program to avoid cuts.

According to Munnell, promising to protect Social Security “doesn't really have much meaning without saying how you're going to fund these benefits once the trust fund is exhausted."

The 2024 Democratic platform vows to “reject any effort to privatize Social Security or to cut any of the benefits that the American people have earned,” promising to “strengthen the

Dialing down risk was behind

Nevada PERS’ equity rollback

Short-term Treasuries provide a safe cushion, CIO Edmundson says

Steve Edmundson, the chief investment officer of the Nevada Public Employees' Retirement System, is not one to make big, abrupt moves, but in March he did just that.

The self-effacing CIO recommended that the pension fund's board dial down the portfolio’s allocation to equities a whopping 12 percentage points — to 48% from 60% — and steer the money to shortterm Treasuries instead.

The board approved the recom-

mendation, setting in motion the beginning of what Edmundson describes as Nevada PERS’ most conservative risk posture in the past two decades.

“It makes me feel good because we get to our ultimate end objective, which is to reach our return goals with the least amount of risk possible,” he said in an interview.

The move was not so much about high equity valuations and the possibility of a market downturn, but rather the high-interest-rate environment that Edmundson believes has normalized.

Why, Edmundson reasoned, take on more equity risk than necessary at a time when higher interest rates on U.S. Treasuries can bolster the

Non-governmental defined contributions plans have become increasingly important to participants’ retirement, and stocks have dominated those investments. Nearly three-quarters of plan assets are invested in equities, according to Vanguard’s latest How America Saves report. However, increased equity volatility has resulted in participants shifting from equity funds to fixed income as measured by daily transfers.

DC plan growth: DC assets outside of state/local and the federal governments have grown 163% to $9.95 trillion from the end of 2010 through March 2024. During that period, defined benefit assets increased 14% to $3.25 trillion.

Assets, private DB vs. DC (trillions)

DC allocations: There has been a marked increase in allocations to target-date funds, to 41% of assets last year vs. 23% in 2014. Cash, diversified equity funds and company stock fell over that time; however, total equity allocations still grew.

DC asset-weighted allocation

Younger workers ♥ TDFs: Younger workers have a greater allocation to targetdate funds. Among those under 25, it made up 79% of their allocation, and it was 25% for those 65 and older. The median equity allocation was 88% for those under 25 and 47% for individuals at least 65 years old.

DC asset allocation by age group

Volatility effects: As equity volatility increases, participants tend to move money from equity to fixed income, according to the Alight Solutions 401(k) index. During the first two months of Q3, there were 33 fixed-income days and 11 equity days as the Cboe VIX climbed to an average of 17.2, from 14 the previous quarter. Alight 401(k) index and equity volatility

SPONSORSHIP CRUCIAL: Kresge Foundation’s Venus Phillips

DIFFERENT PATHS: Presidential candidates Kamala Harris and Donald Trump

Barings’ Ockerbloom on stagnant markets and the best opportunities

John Ockerbloom has had a wild ride. He was promoted to head Barings’ newly combined U.S. and European real estate business earlier this year at a time when higher interest rates and the pandemic ripple effects were shaking up the asset class.

Higher interest rates “created real stagnation in deal ow,” which has yet to free up, Ockerbloom said in his rst interview since assuming the

enhanced role. He now oversees a global team of 197 real estate professionals managing a combined $46 billion in assets under management and assets under advisement. About $4 billion of the total is AUA.

Barings invests across sectors, from core debt to opportunistic real estate and everything in between, Ockerbloom said.

“That was the vision we had when we brought the (real estate equity and debt) businesses together in the

U.S.,” a couple of years ago, he said.

Then in March, Barings quietly brought its U.S. and European real estate equity and debt teams together and promoted Ockerbloom, a managing director, to head of U.S. and European real estate. The combination was “an evolutionary change” for Barings, a subsidiary of MassMutual, he said.

Ockerbloom said Barings is taking a similar research-driven, collaborative approach to investing in Europe, its second-largest real estate business, as it is taking in the U.S.

The combined teams are focusing on how to manage their portfolios “particularly as our market evolves in of ce and other areas” and encounters inevitable challenges, he said.

Among the challenges is the still muted transaction volume, as real estate buyers and sellers, for the most part, cannot settle on price.

Adding to the problem is that the “banks that had been substantial lenders have exited,” Ockerbloom said. “The bank lending market in real estate is really not functional,” which is a favorable trend for a lender, he said.

MassMutual has been in the real estate lending business since 1966. MassMutual’s real estate lending business ultimately was integrated into Barings in 2016 as part of a combination of MassMutual’s boutique investment management businesses under the Barings brand.

As of June 30, Barings had $29 billion in global real estate debt AUM. Many of the transactions that are getting done are at signi cant discounts to the purchase price and discounts to the price expectations they had for those properties two years ago, Ockerbloom said.

While much of the distress is in the of ce sector, there are other areas where sellers are taking discounts. Prices are being cut on some residential and logistics properties because though demand is strong, rental growth is more muted, he said.

Debt coming due

One factor motivating price cuts, much of which is in the troubled ofce sector, is that debt is coming due, which is “calling the question” of whether to keep paying money to continue owning the property, he said.

According to S&P Global Market Intelligence, roughly $950 billion in commercial real estate mortgages are set to mature in 2024, peaking in 2027 at $1.3 trillion.

With mortgages maturing, property owners are not necessarily facing foreclosure. Indeed, banks in particular have been giving borrowers more time to work out their loans, he said.

“The re nance wall is not a wall but a soft barrier that is more exible than people thought,” Ockerbloom said.

Rather, property owners faced with loan maturities will decide whether now is the time to extend the loan and continue to fund the property, or whether the sounder approach is to look at other options including a sale, Ockerbloom said.

CHALLENGES

Public

Private

Canadian funds going big with infrastructure projects

Alternatives Investments in Brazilian water rm and American Tower lead recent moves

B PALASH GHOSH

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Some Canadian pension funds have recently engaged in large transactions involving infrastructure assets in India and Brazil. Canada Pension Plan Investment Board, Toronto, made a follow-on investment of up to C$532 million ($392 million) in Brazilian water and sanitation company Igua Saneamen-

to. The additional investment will support what is expected to be a period of transformational growth for the company after it was awarded a major concession contract in the Brazilian state of Sergipe, said a Sept. 10 news release.

The Sergipe concession will provide water distribution, and sewage collection and treatment services to 74 municipalities across the northeastern Brazilian state.

CPP Investments, which has C$646.8 billion in assets, rst invested in Igua in 2021 as a platform for further investments in Brazil’s water and sanitation sector and holds —

excluding this additional investment — about 61.4% of the company.

Meanwhile, Data Infrastructure Trust, an infrastructure investment trust sponsored by alternative asset rm Brook eld Asset Management, along with af liates of investors including the C$250.4 billion pension fund British Columbia Investment Management Corp., Victoria, and $770 billion Singaporean sovereign wealth fund GIC acquired 100% of the Indian operations of American Tower for an enterprise value of 182 billion Indian rupees ($2.2 billion).

American Tower is a Boston-based real estate investment trust that

owns, develops and operates wireless and broadcast communications infrastructure across the world.

The transaction involved the buyout of about 76,000 communications sites in India, said a Sept. 12 news release.

This deal marked Brook eld’s third acquisition in the Indian telecommunications industry. In 2022, Brook eld acquired a portfolio of 6,300 indoor business solution sites and small cell phone towers, which advances the rollout of 5G and enables telecom operators to extend their coverage capacity in difcult-to-access and dense areas in

India. In 2020, Brook eld acquired a portfolio of about 175,000 towers from Indian rm Reliance Industrial Investments and Holdings. In India itself, Brook eld has about $29 billion in assets under management across the infrastructure, real estate, renewable power and transition, and private equity sectors.

A BCI spokesperson declined to disclose additional nancial details related to the deal but con rmed that BCI is a “signi cant" minority investor. BCI’s worldwide infrastructure and renewable resources

Investment (LDI) approaches

SOPHIE BAKER

In today’s environment, with many U.S. plans reaching fully funded or overfunded status, reassessing LDI strategies is crucial. Our panel, “Optimizing LDI Strategies to Meet Objectives,” will explore how plan sponsors can better manage ongoing, closed, or frozen plans by tailoring approaches for both return-seeking and liability-hedging portfolios. Key discussion topics:

• Evaluating LDI structure for various stages of the funding cycle.

• Reassessing your glidepath – when is it time for a change?

• Effective risk analysis and portfolio management.

PANEL SPEAKERS:

MODERATOR: Megan Nichols Sr. Partner, Head of Pension Settlement Solutions Aon

David Eichhorn, CFA Chief Executive Officer and Head of Investment Strategies NISA

Mike Jarasitis Pension Strategist Fidelity Investments

Steve Mullin, CFA Head of High-Grade Strategies MetLife Investment Management (MIM)

Shawn Pope, CFA Senior Director of Investments Cox Enterprises

BlackRock has created a new private credit division, a spokesperson con rmed — the latest move by the world’s largest money manager in the area of private markets.

The division, global direct lending, will be led by Stephan Caron, head of European private debt, she said.

The $10.65 trillion money manager runs about $35 billion in direct lending assets, according to Bloomberg.

The move is the latest by the money manager to expand in private markets. In its last quarterly earnings update, for the three months ended June 30, CEO Larry Fink said: “BlackRock is executing on the broadest opportunity set we’ve seen in years, including in private markets, Aladdin and whole portfolio solutions across both ETFs and active.”

In July, BlackRock agreed to acquire U.K.-based private markets data rm Preqin in a $3.2 billion cash deal. The agreement expands its Aladdin technology and data platform capabilities, the rm said at the time, and marked a strategic expansion of the technology business into the private markets data segment. Preqin’s data covers private debt among other private markets asset classes.

The Preqin deal followed the June announcement that BlackRock had agreed to acquire growth and venture debt nancing rm Kreos Capital. At the time, the rm said the deal plugged a gap in the Europe, Middle East and Africa region, and added capabilities in a high-growth part of the private debt market.

The rm has also been adding investment expertise in private credit across the globe, including the appointment of Stephen Allan as head of Australasia private credit in December, a new addition to expand the Asia-Paci c private credit team.

BlackRock said in its 2024 private markets outlook that it sees the potential for the global

Get ready for a groundbreaking panel discussion where

the

and discover what’s

Sandy Blair Chief, Administrator Savings Plus California State Employee 401(k) & 457(b) Plans

Jeb Burns Chief Investment Officer Municipal Employee Retirement System

Vikrant Arya CFA, CAIA MD, Retirement Investing Group TIAA/Nuveen

Matthew Gray Assistant Vice President, Worksite and Middle Markets Allianz Life

Barbara Erickson Retirement Specialist The J. David Gladstone Institutes

Michael Jabs Associate Director, Treasury - Pension The Kraft Heinz Company

Nick Nefouse, CFA MD, Global Head of Retirement SolutionsMulti-Asset Strategies & Solutions (MASS) BlackRock

Daniel Oldroyd CFA, CAIA Portfolio Manager and Head of Target Date Strategies J.P. Morgan

POSITIVE INFLUENCES

P&I celebrates Influential Women program at Nasdaq closing bell

Joined by honorees and guests, Pensions & Investments President and Publisher Nikki Pirrello celebrated the 2024 Influential Women in Institutional Investing at the Nasdaq exchange on Sept. 9.

Pirrello was joined by Veebha Mehta, chief operating officer of Crain Communications, the parent of P&I, interim Editor-in-Chief Julie Tatge and other members of the P&I editorial, sales and conference staff.

The list and related stories, which published online and in print Sept. 9, honored 60 women who varied in background, experience and their role in the institutional investment industry. P&I also launched the inaugural Rising Stars program, which recognized 40 women for their early impact and influence. The package can be found online at pionline.com/influentialwomen2024

To be considered for IWII recognition, nominees needed to be actively employed in the institutional investing field and have a minimum of seven years of industry experience.

They also were required to demonstrate a measurable effect and results within both their workplace and the industry. Ideal candidates were expected to exhibit a commitment to attracting, retaining, supporting and promoting women within the industry.

P&I held a conference in Chicago on Sept. 12 to recognize the winners. Conference speakers and panels explored leadership, sponsorship, entrepreneurship and closing America’s retirement savings gaps.

CELEBRATION: Honorees, friends and P&I staffers gathered to celebrate the 2024 Influential Women in Institutional Investing program at the closing of the Nasdaq exchange Sept. 9.

Yale Investments

offering a ‘new haven’ for aspiring fund managers

Yale Investments, which manages Yale University's $40.7 billion endowment fund, is rolling out a program to help aspiring asset managers start their own investment funds.

The Prospect Fellowship is an eight-week program where five individuals will have the chance to “hone their investment approaches and receive funding to build their businesses ... while harnessing the resources of Yale Investments and forging deep connections within (Yale Investments') office and network," according to a notice on the New Haven, Conn.-based university's website.

Yale Investments will lend each fellow up to $2 million in working capital to help build up their new funds. Then, each fellow will receive a minimum investment of $25

million at launch with an additional $25 million as a follow-on investment.

In return, Yale will receive capacity rights and pro rata co-investment rights, but will not acquire stakes in the funds or participate in revenue sharing.

Applications for the fellowship — which will take place in the spring of 2025 — are due by Oct. 14. Winners will be selected by the end of 2024.

A program spokesperson said the impetus for the fellowship stems from Yale’s “willingness to back up-and-coming, often unproven investment talent.”

With Prospect, “we hope to offer a new avenue for productive, value-added partnership at the moment when it is most

MISSION

ALIGNED

Janus Henderson to aim 3-year donation at fighting cancer

Now you can preserve capital, maintain liquidity and fight cancer, all in one go.

On Sept. 16, Janus Henderson announced that over the next three years it will donate half of the fees it earns managing the firm’s $400 million government money market fund to the American Cancer Society’s advocacy, research and patient support efforts.

And while no one at present anticipates a return to the days of rock bottom interest rates that forced managers of money market funds to slash fees or eliminate them entirely, Janus Henderson apparently isn’t taking any chances, guaranteeing a minimum donation of $1 million a year over that three-year span.

That gesture is the first fruit of an initiative the firm — with one legacy foot in London and another in Denver — launched earlier this year, called the “Brighter Future Project,” which looks to connect Janus Henderson’s “mission, values, and capabilities to the aspirations of our clients, the communities we serve and our employees.”

A spokeswoman for the firm said the decision to support a health-related cause as the project’s first move reflected the preferences of Janus Henderson employees.

Janus Henderson CEO Ali Dibadj, in a news release, noting the “devastating” financial burden of a cancer diagnosis, said with his firm’s initiative to support the American Cancer Society, Janus Henderson clients can “easily support ACS’ critical work in advocacy, research, and patient support, helping to improve the lives of both cancer patients and their families.”

Karen Knudsen, CEO of the American Cancer Society, in the same news release, said Janus Henderson’s support will help ACS fund critical research and support for cancer patients.

DOUGLAS APPELL

impactful,” the spokesperson added. “Serious candidates will likely have significant investment experience, although we do not favor one particular candidate profile — you may have developed your skills

through life experience, which we find exciting," Yale said in the notice.

A SYSTEMATIC PATH TO TRUE DIVERSIFICATION

In the current market environment, are you relying on private assets to provide uncorrelated exposures that can help protect your total investment portfolio?

That approach may not work, given today’s accelerated market volatility, which tends to impact both public and private markets. Often investors underestimate the degree of diversification in their portfolios because, since the global financial crisis, equity outperformance has created a false sense of confidence, said Philip Seager, head of portfolio management at Capital Fund Management, or CFM, a global quantitative and systematic asset management firm. “Legitimate uncorrelation is rare because so many asset classes and investment strategies are correlated with equity premia.”

Institutional allocators can access true uncorrelation from traditional assets by investing in a combination of zero-correlated, positive-gain strategies that deliver better risk-adjusted returns over the long term, Seager said. These systematic approaches include market-neutral strategies that are simultaneously long and short financial assets, and directional strategies that are long or short for periods, thus averaging to zero through time.

CFM also incorporates systematic hedge strategies alongside its diversifying strategies to increase upside potential when volatility spikes. “Building such products is our breadand-butter business,” Seager said.

A VOLATILE BACKDROP

Today “there is more potential for upcoming market volatility,” he noted, given mixed economic signals and heightened geopolitical tension — from a more polarized political environment in the U.S. and ongoing conflicts overseas. Investors are also contending with the implications of the expected interest rate cutting cycle and the possibility that inflation could reemerge. In addition, the dramatic growth of the Magnificent Seven stocks has increased equity concentration risk, and signaling heightened market volatility, the CBOE Volatility index, or VIX, spiked in August.

While allocators are always paying attention to appropriate diversification, the confluence of market impacts make it more crucial today. “Diversification is more important now than ever before, but when is it not important? Diversification should be at the forefront of every investor’s mind — all the time,” Seager said.

Yet investors often misunderstand the extent to which they’re diversified and the strategies that can provide actual diversification, so they can end up disappointed by the performance of what they think of as diversifiers. “For instance, when volatility spikes, equities go down, but a diversifier could, in equal measure, go up, down or remain unmoved. Many don’t understand that being up when equities are down is a hedge rather than a diversifier,” he said.

OVERESTIMATION

“Equity outperformance over the last 10 to 15 years is a statistical fluke. There’s been a lot of support from monetary policies that have pushed asset prices up,” Seager said. “By its nature, that upward pressure is a fluctuation that is unlikely to continue, and we will see a reversion back to the mean, which is a level of risk-adjusted returns that is lower and more consistent with what we’ve seen historically.”

Also, in the rising-equity environment, many investors dived into private market strategies “that are really just leveraged versions of equities,” said Seager. “People have moved aggressively into the private markets space thinking they would be diversified, but those returns come from the equity premium. You also get some premium from holding an illiquid position, but there’s not much more to it than that.”

“There’s actually a lack of diversification, and portfolios are nowhere near as diversified as people think,” he said.

POOR CORRELATION

Neither do fixed-income instruments always exhibit the diversifying features that they once did. While fixed income was steady for a period after the global financial crisis, mainly because inflation was low, in recent years the Federal Reserve has been tackling an inflationary regime.

Legitimate uncorrelation is rare because so many asset classes and investment strategies are correlated with equity premia.

“It might look like inflation is tamed, but fiscal policies are not helping to get it under control, and as long as we see inflation, real interest rates can be pushed lower, which isn’t good for fixed income, and it’s not good for equities either,” he said.

While the correlation between bonds and equities over the last 20 years has been mostly negative, according to CFM’s research, it is a statistical outlier. “The correlation between bonds and equities has actually been positive through most of history,”1 Seager said.

Therefore, “you do not get diversification or a hedge from bonds, and since the recent rise in inflation, that negative correlation has flipped and become positive. On a forward-looking basis, you get less diversification from a 60/40 portfolio than was previously the case,” he said.

PRAGMATIC PROCESS

CFM takes a practical approach to the use of quantitative strategies that deliver diversification. “We’re not guided by any sort of dogma about what should work. It’s based on trying to maximize risk-adjusted returns on a forward-looking basis by forecasting markets,” Seager said. In certain situations, one data set could forecast the market on a relative-value basis, another could forecast on a directional basis, and some could forecast both.

“We look at a wide set of markets and asset classes, including equity indices, fixed-income instruments and commodities. We do it empirically, and we use what works best in each environment,” he said.

The starting point is forecasting an instrument — including futures, options, credit or a single stock — which presents many

different strategies for the firm to pursue. “The more strategies you have, the better to broaden diversification,” he said.

The key to delivering diversification is the ability to understand the correlations among all the instruments. “We’ve been developing and fine-tuning this process for decades,” he said. CFM has two research groups that work closely together, one for forecasting and the other for portfolio construction. We “combine all of these price forecasts and construct a portfolio that’s as robustly diversified as possible and trades with the lowest execution cost.”

THE ‘BLACK BOX’

One concern that CFM hears from prospective clients is a general mistrust of algorithms versus human input in the investment process. “Algorithms have become ubiquitous in daily life, and advances in data-driven techniques have dramatically improved people’s health, safety and quality of life. Yet in many situations, people fear they will underperform” as an investment process, said Seager.

“Many fear that a systematic process is too ‘black box.’ On the contrary. There is nothing more black box than the human brain, which is prone to biases and demonstrates less repeatability,” he said.

The best investment outcomes, according to Seager, depend on a repeatable, systematic process that reacts in a rulesbased fashion in response to inputs from the market. “Our research process finds systematic patterns that occur and recur, and those patterns are then implemented in an unbiased fashion — even to exploit those inefficiencies in markets that are caused by human biases.”

“Data is becoming ever-more voluminous and available for consumption, and it gives quants a significant advantage over discretionary investors, because their investment decisions are better informed,” he said. Another advantage for a quantitative investor is Large Language Models that bridge the gap between quantitative and discretionary approaches. “We now have algorithms that trawl through mountains of text data to evaluate market sentiment and detect investment signals,” he said.

That said, CFM’s biggest asset is people, Seager said. “We recruit people with science backgrounds alongside those who have financial market experience so we can build algorithms with the right data and get the best outcomes.”

“We’ve been building strategies that are truly uncorrelated with traditional markets and provide genuine diversification since the early ’90s. It’s always the right time to diversify, but today it’s even more important than before.” ■

Sponsored by:

Philip Seager Head of Portfolio Management

(CFM)

OPINION

OTHER VIEWS BOB ELLIOTT

For asset allocators, it’s time to rewrite the playbook on high hedge fund fees

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients” — Warren Buffett

Hedge funds are a predominant force in the investment management industry. From the television show “Billions” to the films “Wall Street” and “The Big Short,” they are often portrayed as savvy investment management talent, able to handily outperform over the long term. The narrative that you can share in the success and benefit from their brilliance is compelling. But it often plays out differently in real world applications.

It is not that hedge funds cannot generate alpha. Many do, and it would be irrational as an allocator to ignore their success. The prevailing issue, however, is that allocators often receive diluted benefits from alpha generation due to the burdensome fees they incur. Quite simply, hedge fund managers are benefiting asymmetrically from fees charged to pension funds, endowments and other large investors, in some cases passing along only 41 cents of every $1 made.

How did we get here? While many advancements in the financial sector have helped to drive down fees — think ETFs and mutual funds — hedge funds have endeavored to maintain the classic 2-and-20 model. Some managers may still deliver outsized returns, but their high fee structures can result in the end investor experiencing muted returns.

A less evident aspect to consider is, in some cases, pass-through expenses further erode the returns the client ultimately receives. Some managers have gone as far as to pass through to the end investor expenses for employee salaries, back-office administration and research fees.

A common defense from managers is that these fees support recruiting and retaining the “best and brightest” investment management talent.  While this may be true, it does not negate that, even with the impact of elite talent, hedge funds often underperform benchmarks after factoring in the fees.

As the landscape of investment management continues to evolve there is some good news: (1) fees are generally negotiable and (2) innovative products are emerging that empower all investors, regardless of size, with alternatives to the traditional 2-and-20 model.

Why now?

At the end of the day, hedge fund managers survive on fees. And like any business, customers, in this case allocators, have an opportunity to negotiate what they are willing to pay. Multiple factors are now converging to make this the ideal time to challenge the traditional hedge fund fee structure.   First, interest rates have reverted to an elevated level after years of being zero bound.

Many existing allocator contracts were signed during the zero-interest years, when less consideration was given to implementing cash hurdles. The cash hurdle effectively allows for incentives to be paid to hedge funds only if and when they outperform cash. If an allocator can earn close to 5% on cash, it seems reasonable to expect that benchmark should be applied when evaluating the alpha generated by a hedge fund.   Second, after incorporating fees, many hedge funds’ returns trail the returns of passive index funds. Allocators should instead incur fees on the alpha, meaning returns in excess of market returns, taking into consideration correlation benefits of the strategies implemented by hedge fund managers. Similar to the cash hurdle described above, it is possible to negotiate fees to apply above a

relevant benchmark return stream.

Third, there are an increasing number of alternative investment products that offer access to the return attributes of selective hedge fund strategies but at a lower cost than the 2-and-20. Hedge fund replication, for example, has advanced meaningfully over the past decade, and depending on the strategy, allocators may be able to find index-like products at lower fees, that also offer improved liquidity and better transparency than direct investments in individual hedge funds. Fourth, it has become increasingly difficult for hedge funds to raise capital. This is largely due to (i) a seemingly persistent public equity market, (ii) years of underwhelming performance relative to other investment options, and (iii) significant rotation into private assets.

Bob Elliott is CEO, CIO and co-founder of investment firm Unlimited. He is based in New York.

OTHER VIEWS ZHILEI XU, YANGFAN LI and RENEE YAO

Can modern AI help hedge funds ‘count the cards’?

Machine learning research began over 50 years ago and evolved steadily until the emergence of modern artificial intelligence. Techniques such as principal component analysis, support vector machines, random forests, and even artificial neural networks are all considered traditional ML approaches. Modern AI builds upon these traditional ML methods and leverages increased computational power, enabling it to demonstrate remarkable capabilities across a wide range of applications, from route navigation and protein design to, most notably, the development of advanced conversational models like ChatGPT.

Can AI ‘count the cards’?

Investing is a forecasting business. All investors need to forecast future returns to generate alpha. The stock market is considered random and unpredictable, making forecasting accuracy low due to noise. Can modern AI forecast returns better than humans? We make the analogy that blackjack is like the stock market. The only way to win at blackjack is to “count the cards” because the house has an edge. The market can be thought of as the world’s largest blackjack game, and modern AI can help hedge funds “count the cards” to achieve outperforming returns. Traditional ML often identifies associations in data, which can mistakenly imply causal relationships. For example, we might observe a 100% association between a wet lawn and

rainfall, but traditional ML could erroneously suggest that the wet lawn causes the rain — a clear misinterpretation. Such a model might build confidence in this faulty assumption over successive rainy days. However, on a sunny day when a gardener waters the lawn, traditional ML could wrongly predict rain with high confidence. If investments were made based on that prediction, significant losses could follow — highlighting the limitations of traditional ML in financial decision-making.

While it’s clear that a wet lawn does not cause rain, signals in financial markets are much less straightforward. Modern AI, utilizing advanced nonlinear models and a broader range of input data, can identify leading indicators and uncover genuine causal relationships. In the previous example, modern AI would understand the phenomena of rainfall and a wet lawn, then determine that it is the rainfall that wets the lawn. This capability can help prevent potential losses and turn them into gains.

Essentially, modern AI discovers

the causes behind signals (beyond just association), providing a more reliable basis for identifying investment opportunities. It acts like a noise-canceling system, filtering out misleading correlations and uncovering true causal links. Though even modern AI cannot identify causal relationships with 100% certainty, it offers a slight edge over traditional ML. All that is needed is to “count 1–3 cards” which leads to a 2% edge, similar to a casino’s edge. Hedge funds leverage this edge by making a large number of trades, relying on the law of large numbers to amplify their advantage and generate consistent positive returns. Owning the “math” is the edge every hedge fund strives to achieve.

One strength for hedge funds — sizing

Traditional ML often results in a constant bet size or leverage, as these models cannot predict how much the market will move in their favor. However, what differentiates modern AI is its forward-looking approach, constantly searching for leading

else is out there. Beginning new relationships can provide the opportunity to negotiate new fee structures from the outset.

indicators in the market. This allows the AI to increase its bets when it identifies more alpha opportunities and reduce them when it sees less, just like a card player has to forecast how much to bet on the next hand. Sizing alpha is an under-appreciated component of modern AI and allows an investor to produce a convex/asymmetric payoff — resulting in positive skewness (or convexity), uncommon among hedge funds.

Modern AI is also revolutionizing intraday trading by processing vast amounts of real-time data — including price movements, trading volumes, and news sentiment — to uncover patterns and predictive signals that are beyond humans’ ability to process; it can adjust trading strategies on the fly, dynamically altering the sizing of trades based on predicted price movements and volume shifts. This capability enables more precise entry and exit points, optimizing trade execution throughout the day. By continuously adapting to evolving market conditions, modern AI provides a critical edge in capturing short-term market opportunities.

AI’s adoption is challenging but inevitable

First, a manager needs an edge and a time horizon to minimize risk/variance. AI, like any forecast-

ing technology, will have periods of underperformance until skill emerges. While modern AI is undoubtedly a powerful tool, specialized skills are required to effectively apply it to investment; if modern AI is akin to a magic wand, wielding it skillfully involves understanding and innovating intricate “spells.” This is why opinions vary on AI’s potential in investment. Some are able to design models that deliver exceptional results; while others may struggle to outperform traditional methods. The ability to design high-performing AI models is the competitive edge that sets leading hedge funds apart.

Modern AI has already impressed the world with its capabilities in generating text (such as ChatGPT and Gemini), images (like DALL-E), and even videos (such as Sora). We believe AI is poised to revolutionize hedge fund strategies by effectively “counting the cards” and driving exceptional performance. As we stand at the forefront of this unfolding revolution, it is clear that the advantage of modern AI today may not yet be fully apparent, but we are confident that its adoption will be inevitable in the decade ahead. n

This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.

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All told, new launches are now less frequent and are being made at smaller size.

Next steps

As an allocator you have an enhanced ability to negotiate the fees you pay. You have likely picked great managers, but now is time to revisit to make sure the economics are equitable and reflective of the emergent competitive landscape. So what can allocators do?

Start by addressing the cash hurdle rate. If an allocator can earn close to 5% on cash, it seems reasonable to expect that benchmark should be applied when evaluating the alpha generated.  We are not alone in thinking this. A group of allocators led by the $202 billion Texas Teacher Retirement System in Austin recently raised this point in an open letter to the industry.

Next, improve the alignment of interests by evaluating and challenging pass-through expens-

es related to the manager’s operations.  Managers should bear their cost of their operations independently, not dilute the returns the investor achieves. Sometimes these can be difficult to distinguish from valid fund operational expenses, which are important independent control mechanisms (audit, admin, tax, custody, etc.).

Consider employing different firms — how long have you been with your current hedge funds? As with other services, it may make sense to shop around and see what

Finally, initiate an allocation to lower-cost hedge-fund-index replication products. Use it as a benchmark to assess your existing managers and whether the fees they charge are worth it. Take advantage of the liquidity in these products to remain fully invested during transition periods between managers or to increase the overall portfolio liquidity profile.

Ultimately, allocators have the fiduciary responsibility to protect clients’ assets.

Every dollar a manager charges is one less dollar available to the end investor. Hedge funds can play an important role in your portfolio, but teachers and firefighters should not subsidize their operations. Given the competitive landscape and the availability of new replication alternatives, now is the time to push back on high fees.

We're excited to offer the next level of article reprints! A stand-alone HTML digital article that will never be placed behind a subscription paywall. The P&I HTML reprint can be licensed to post to your website, share on social media, used in email correspondence, presentations and so much more.

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Zhilei Xu and Yangfan Li are quantitative researchers and Renee Yao is the chief investment officer at Neo Ivy Capital. They are all based in New York.

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funding & buyout indexes

ETFs are making a move to the trading oor at NYSE

y B ARI I. WEINBERG

The “Home of ETFs” has put on an addition.

Over the last two years, the New York Stock Exchange, a unit of Intercontinental Exchange, has attracted more than 30 exchange-traded funds to the NYSE oor. Traditionally handling ETFs on its all-electronic Arca exchange, NYSE launched oor listing as an additional venue to attract issuers and products.

Despite higher aggregate listing and maintenance fees for oor treatment, some issuers say that the bene ts are worth the incremental cost.

In November 2022, xed-income specialist PIMCO was the rst asset manager to bring an ETF to NYSE. Switching the $4.8 billion PIMCO Active Bond ETF, or BOND, to the oor meant its trading would include the oversight of a designated market maker, obligated under exchange rules to facilitate opening and closing auctions and incentivized to maintain tighter trading spreads.

Other listing venues — Arca, Nasdaq and Cboe — all have programs and rebates designed to narrow spreads. And many ETF issuers have capital markets desks that can help guide investors on signi cant trades. But as the market has been ooded with new products, particularly actively managed stock and bond ETFs and those employing derivatives in their strategies, more issuers are looking for ways to demonstrate to prospective investors that their ETFs have tight spreads and ample liquidity.

The shift to the oor is part of the evolution of exchange-traded products beyond index funds. U.S. ETP listings now top 3,000, with roughly 60% listed on NYSE properties, and around 20% for both Nasdaq and Cboe. All three have trading and incentive programs designed to improve quoting and tighten spreads, though any adjustments to their rules have to be approved by the U.S. Securities and Exchange Commission.

For PIMCO’s BOND, average daily spreads were cut in half, ranging from 2 and 4 basis points since November 2022, compared to between 6 to 8 basis points for the immediately prior period, according to data provided by FactSet Research Systems. BOND competitors from J.P. Morgan Asset Management and Eaton Vance, a unit of Morgan Stanley, have also moved to the oor.

“A designated market maker can help the order book at size and add tightness to trading,” said Paul Weisbruch, head of ETF issuer services at GTS, which serves as DMM for 23 ETFs, including the entire suite of offerings from Strive Asset Management and TCW Group.

Strive, which has $1.5 billion in assets under management across 12 ETFs, took its products to the oor in January, while TCW, with $1.4 billion across six ETFs, moved in late May.  Still, trading spreads in ETFs are also a function of the liquidity of underlying assets. For example, similar products from Strive and TCW that add governance preferences to a basket of the 500 largest U.S. publicly traded stocks, saw only marginal spread improvement, according to FactSet.

NYSE, the ETFs that had transferred to the oor through the second quarter of 2024 had seen average spreads cut to 18 basis points from 41 basis points, mostly experienced by smaller products with limited trading. Opening slippage, the drop in the expected price on market orders on open, fell to 25 basis points from 68 basis points.

“It’s a little bit of back to future,” said Douglas Yones, head of exchange products at NYSE. When ETFs rst listed on the American Stock Exchange in the 1990s, they were guided by specialists. “Now

we’re combining technology with a human element to solve a problem for some ETFs.”

A head-scratcher caveat

For years, ETF trading has come with caveats. “Avoid the open and close. Don’t place market orders,” distributors say. For those investors jumping to ETFs from mutual funds, this conversation was always a head-scratcher. Mutual funds only had one price. So, issuers new to the ETF market would need to either to SEE TRADING ON PAGE 17

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P&I: Is it ‘prime time’ for CLOs today?

PRIME TIME FOR CLOs

For institutional investors looking for diversifi cation strategies, collateralized loan obligations can be a stable option that provides downside protection in an uncertain macro environment. A market that tops $1 trillion, CLOs are floating-rate instruments that sit within the larger structured credit market. They have different tranches, each with its own risk-reward profile, cash flow structure and credit rating. As such, CLOs can fit into different allocation sleeves within an institutional portfolio. CLO managers Barings, Polen Capital and Sycamore Tree Capital Partners dig into current market dynamics and the potential impact of lower rates on the asset class. They unpack what increased CLO issuance means for investors and highlight manager characteristics needed to successfully navigate this market.

“It definitely is prime time for CLOs,” said Adrienne Butler, head of global CLOs at Barings. “We have seen stars align across the industry, both on the issuance side and on the investing side, which makes it a potentially beneficial time to be invested in CLOs.” The firm has seen strong demand for floating-rate products up and down the capital stack, from triple-A rated to equity tranches, she said.

The macro environment, with uncertainty around economic growth and interest rates, is supportive. “Having a diverse pool of assets in a time like this is really important because you don’t have complete visibility on where rates are going to go or on any kind of exogenous shocks or geopolitical events,” Butler said. “Having a highly diverse pool that you can invest in provides you a degree of confidence in what might be a more volatile market.”

CLOs have gained popularity among institutional investors as they have evolved from a niche product to a broadly used fixed-income alternative, according to Jack Yang, co-founder and president of Sycamore Tree Capital Partners. In addition, the user base of the asset class has expanded beyond banks and insurance companies to include, notably, public pension plans, endowments and asset managers.

“We see CLOs gaining utilization in portfolios, similar to how high-yield bonds and bank loans have done previously. This is now a thoroughly researched, $1 trillion market that offers potential return, diversification and hedging benefits versus traditional fixed income,” Yang said. “With asset managers, pension funds and even mutual funds increasingly investing in CLOs, you could over time see the size of the CLO market grow dramatically, even double from where it is today.”

P&I: What’s driving strong CLO deal volume in recent years, and do you expect that to persist?

Lower rates driven by the Federal Reserve’s easy-money policy after the Great Recession and then following the pandemic helped increase interest in CLOs, and refinancing was a major component that benefitted borrowers. But in the subsequent higher-rate environment, the question is whether the factors that drew borrowers and lenders to the CLO market will remain.

“We have seen stars align across the industry, both on the issuance side and on the investing side, which makes it a potentially beneficial time to be invested in CLOs.”

— ADRIENNE BUTLER, BARINGS

Jim Stehli, co-lead of the CLO platform at Polen Capital, pointed out that CLOs have become the largest securitized asset class, another contributor to its use and popularity. “Its size and scale provide investors with a large enough investible universe, across the whole rating spectrum, to consider as part of either a fixed-income allocation or an alternative investment allocation,” he said. “The market size is important, and from a product features perspective, structure is one of the key components of CLOs. The product has been performing well for over 25 years — it’s been tested through various cycles.”

Stehli said that he expects that two components that have emerged relatively recently — tighter credit spreads and relatively calm markets — will keep interest high in CLOs. Through midyear, volumes on broadly syndicated loan CLOs as well as new issue middle market and private credit CLOs are up 80% over last year, he noted. “On top of that, you’ve got a huge refinance and reset cycle happening,” he said. “In both cases, these outcomes are largely driven by tighter credit spreads overall and relatively lower volatility, allowing investors to participate in these deals.”

“With record CLO issuance expected in 2024, we anticipate continued growth in CLO volume due to attractive conditions for both assets and liabilities,” Yang said. Sycamore Tree Capital Partners is seeing investor demand for CLO debt and equity grow as well, with both existing and new investors increasing capital allocations.

The combination of institutional investors’ positive return experience over the last 14 to 15 months and the level of CLOs being called and refinanced is likely to keep volume humming, Butler said. “Even with possible rate cuts on the horizon, there is still demand for floating-rate products right now” with new issue and refinancing activity garnering demand from investors who are receiving repayments of existing exposure to CLOs, she said. “CLOs, in general, offer attractive relative value compared to other fixed-income or floating-rate products, and the market remains an attractive place to invest.”

P&I: What’s your outlook on the current rate cycle, where we may be at the peak on interest rates, and its impact on CLO assets as well as underlying loans by borrowers?

“While we expect the inverted yield curve to normalize, we see rates reverting to levels consistent with long-term historical averages, not the near-zero rates

created by global government interventions since the great financial crisis,” Yang said, adding that Sycamore Tree expects to see base rates of 3% to 4% over the next few years. “We see CLOs having ongoing attractive relative value compared to other corporate and structured credit.”

With the Fed poised to embark on its interest rate cutting cycle, Butler said, lower rates could bode well for the CLO market. “That’s a positive that would lead to lower cost of capital and increased cash flows for the underlying loan issuers in the portfolio,” she said. In addition, “lower rates may very well trigger an upsurge in M&A activity, which could increase loan volume and ultimately help to create additional diversity and growth within the CLO market.” Once base rates are cut to some degree, she noted, that could boost consumer-related sectors, such as retail services.

Even when rates come down, CLOs will likely remain attractive relative to other credit vehicles, such as investment grade and high yield, Stehli said. “Most economists seem to be forecasting a target fed funds rate of 3.5% to 4% by late 2025 into 2026,” he said. “That’s still a far cry from where we were at 0% post-COVID into early 2022. Despite CLOs being floating-rate instruments, there remains an implied risk-free base rate of 3.5% to 4%. Triple-A rated CLOs are still pretty attractive, yielding at 5%-plus, while the entire CLO stack is going to be closer to 6.5% to 7%-plus. We think that’s going to represent an attractive potential return compared with investment grade and high yield overall.”

P&I: Looking ahead, are you concerned about rising corporate defaults and their impact on the CLO market?

For CLO managers, keeping a close eye on defaults is a critical function that’s related to the economic backdrop. “We follow very closely what’s going on in the fundamental economy of the United States,” Yang said. “The bank loan market is a relevant microcosm of the overall economy, so a lot of our call on what happens with defaults is a function of our outlook on the economy.”

default rates, but it’s important to be cautious and committed, and also to be involved in liability-management exercise activity. Having a deep research team with experience in the market, understanding those LME activities and having the market relationships are going to be really important,” Butler said.

P&I: Where do CLOs best fit within an institutional portfolio?

The wide range of institutions active in the CLO market, from insurance companies and pension funds to hedge funds, is a proof point of the asset class’s versatility.

“CLOs can fit into a variety of different portfolios,” Butler said. “How you categorize the asset class depends on where in the capital stack you’re investing. This versatility also speaks to why we’re seeing this as a compelling time for CLOs. Up and down the capital structure, everybody seems to be finding something to meet their needs.”

“Throughout the CLO stack, investors can add spread, even as they’re adding protection to the downside through the CLO structure and diversification through the collateral.”

— JIM STEHLI, POLEN CAPITAL

He added, “Over the next six to 12 months, we’re constructive. We’ve seen defaults moderate and even come down some from the peaks of ’22 and ’23, post COVID, post the Ukraine invasion. However, I would also say there’s been an uptick in out-of-court restructurings to right-size capital structures.” In any scenario, he said, a CLO manager’s goal should be to avoid defaults and minimize risk as much as possible. “It’s impossible for any manager to outright avoid all ratings downgrades and defaults, but the better we are at identifying and designing process and risk management, the better manager we become.”

“CLO managers are paid to be concerned about defaults,” Stehli said. “Historically, managers have focused on creating upper-tier performance compared with a broader leveraged loan index and, ultimately, managing against the downside of that broader loan market. Defaults are a concern, and that’s what managers are paid to be focused on.”

However, lower rates should bode well for defaults, as they could ease the burden on companies that might be feeling the strain of higher rates. “If we’re at a point where you’ve got many companies that are performing relatively well even in today’s higher rate environment, one would expect that if rates fall from here, that outcome should result in a more constructive backdrop for CLO managers,” Stehli said.

While Barings’ team is seeing default rates leveling off, that doesn’t mean they are any less focused on them. “We’re not overly concerned about a spike in

It depends on the institutional allocator’s portfolio goals, said Stehli.

Since CLO bonds offer a floating rate with a defined reinvestment period and a maturity date along with quarterly coupon payments, “it’s logical to consider including CLO debt in a fixed-income portfolio,” Stehli said. “Meanwhile, CLO equity, in particular, tends to be less liquid, and with a target return of, say, mid-teens, coupled with a more illiquid nature, Polen Capital believes that it’s also desirable to include an allocation to CLO equity as part of an alternative investments portfolio.”

“CLOs have the potential to improve the risk-adjusted returns of portfolios, given low correlation to many asset classes,” Yang said. “Fit varies based on the part of the CLO where the allocator is investing. Floating rate, triple-A through single-A CLO bonds add attractive yield and diversification to core-plus portfolios focused on income and capital preservation. CLO mezzanine debt and equity are being included in return-seeking portfolios, such as opportunistic credit, and in private-market allocations as a complement to direct lending and private equity.”

P&I: Which tranches or ratings should investors focus on to meet their portfolio objectives for yield and diversification?

“Throughout the CLO stack, investors can add spread, even as they’re adding protection to the downside through the CLO structure and diversification through the collateral,” Stehli said.

“By defi nition, CLOs off er diversifi cation on an underlying pool of leveraged loans. Regardless of which tranche you’re looking at — triple A, double B, equity — investors are receiving the benefit of diversification and, therefore, that element of downside protection,” he explained.

“CLOs also offer a pickup in spread to investment grade and high yield,” with 6% to 7% yields on single-A to triple-A rated CLOs attracting U.S. institutional investors, as well as Japanese banks, while the CLO exchange-traded fund market is also drawing the interest of retail investors, he said.

“It depends on what your investment objectives are,” Butler said. “What we’re seeing is that tranches from both top-tier and second-tier managers, as well as across the capital stack, are trading close to par today,” she said. “And the spread basis between the various profi les of deals and tranches have compressed, meaning that differences between managers, between styles, between subordination levels are starting to compress because of the demand. So as

an investor, you want to be very picky with and lean toward high quality investing and liquidity.”

Yang added that one of the key benefits of CLOs for institutional investors is that they can offer a wide range of options from the standpoint of risk, return and liquidity. “Depending upon their objectives, investors can choose how they gain exposure to an actively managed, diversified portfolio of senior secured, fl oating-rate loans with the benefit of stable, long-term, non-markto-market leverage,” he said. For example, triple-A rated CLO bonds can be a good complement to core fixed income while CLO mezzanine debt and equity can be used to deliver income and total return.

P&I: What is your outlook on CLO spreads/ yield against public fixed income and private credit for this year and next?

“CLOs have the potential to improve the risk-adjusted returns of portfolios, given low correlation to many asset classes. Fit varies based on the part of the CLO where the allocator is investing.”

“We remain constructive on 2024 for spreads, as rates remain high and credit spreads, in general, are tight but not necessarily at all-time tight levels,” Stehli said. “We are constructive on CLO triple-A’s, given the large demand for a performing floating-rate bond from U.S. and global banks. Our view is that an investment in triple-A rated CLOs provides a fair return with significant downside protection.”

— JACK YANG, SYCAMORE TREE CAPITAL PARTNERS

Yang pointed to the return potential. “CLO bonds generally provide higher returns than comparably rated corporate bonds due to complexity premiums, despite their attractive performance and protections,” he explained. “The relative value of CLO bonds is likely to continue to be attractive versus conventional fixed income in the year ahead, given they’re priced off of the short end of the yield curve with floating-rate spreads.”

Whether spreads tighten or widen, CLOs look attractive with redeeming qualities in either situation, Butler said. “We’re in a pretty good spot right now in terms of liability pricing relative to prior years,” she said. “We’ve got decent visibility into the asset class with a stronger forward pipeline over the next several weeks. Defaults have stabilized. We expect to see more new-issue loan activity, and that creates a more diverse pool of assets to draw from. So, ultimately, we think CLOs should be a solid investment over the next few years.”

P&I: What are some characteristics of a CLO asset manager that are key to delivering consistent long-term performance?

Track record is critical. “Research shows that top-quartile managers have historically delivered significant relative outperformance,” Yang said. “Our battle-tested experience across credit and market cycles has taught us that disciplined focus on capital preservation supports consistent, long-term performance.”

In addition to a manager’s performance track record, institutional investors

should know whether a manager has successfully navigated different market cycles. “A rising tide lifts all boats,” Yang said, “but it’s market volatility that really tests a manager’s skill and also creates opportunity — the most opportunity, in fact, for the managers to differentiate themselves and create value for their investors.”

“We think that the most important litmus test of evaluating a manager is their performance, particularly during volatile markets,” Yang said.

“The No. 1 takeaway is making sure you have a focus on quality research,” Butler said.

“Having a deep and experienced research team is key. There’s no amount of spread that can make up for a high level of defaults. You want to make sure that you’re buying the right credits and minimizing defaults.”

Beyond that, she added, a CLO manager must have specialized teams that are experienced in structuring and legal review.

“As a manager, we tend to be more conservative in our approach to managing assets and credit quality,” Butler said. “We’re never going to stretch for spread. We’re always going to make sure that our credit quality is top of mind.”

It comes down to process, said Stehli, which can translate into performance. “We believe in protecting against the downside and not overreaching,” he said. “CLO portfolios that are thoughtfully constructed on day one and are underwritten throughout the CLO lifecycle tend to perform better. We prefer a balanced portfolio construction process that provides for a healthy level of diversification.”

P&I: What’s an underappreciated fact about recent — or historical — performance of CLOs that’s interesting?

While CLOs have been around for decades, their qualities of diversifi cation, return generation and resilience are still sometimes a positive revelation to even experienced institutional investors. “The long-term, stable leverage of CLOs creates stability and optionality for investors, yet some allocators are surprised that the highest-returning CLOs, ever, were issued in 2007, right before the global financial crisis,” Yang pointed out.

In addition, investors may not know that in more than 14,000 rated classes of CLOs, just about 20 have defaulted, Stehli said. “All those defaults were in the 2020 era, and all were double-B or single-B rated, so nothing at the triple-A, double-A, single-A or triple-B level.”

Butler added, “Not only have there been no defaults in the triple-A part of the stack, but as of June 2024, S&P reported that no triple-A tranches were even downgraded over nine straight years — which further emphasizes the investment’s stability.” ■

Trading

build up an ETF capital markets desk or work with a third-party platform to support those investor conversations.

“This solution outsources some of the capital markets desk,” Yones said.

That was de nitely the case for Sound Income Strategies, which moved its two ETFs to the oor on June 21.

“We were getting investor feedback that trading spreads had to improve before larger brokerage plat-

Second private credit ETF ling lands within days of Apollo’s

The starting gun has of cially red in the race to launch the rst private credit exchange-traded fund.

An application for the BondBloxx Private Credit CLO ETF landed with regulators on Sept. 12, lings show. Subject to regulatory approval, the proposed fund would invest at least 80% of its assets in collateralized loan obligations, which will be backed by a pool of loans made to private companies.

The BondBloxx ling lands just two days after Apollo Global Management Inc. and State Street Corp. submitted plans for a fund that will include private credit. Demand from retail investors for private securities has boomed alongside the industry itself, with private markets now worth more than $13 trillion. That has investment giants such as BlackRock and Invesco looking for avenues to provide such exposure — a quest that will “absolutely” generate many more ETF lings, according to Todd Sohn of Strategas.

“The ‘private label’ marketing war has commenced,” said Sohn, ETF strategist at Strategas. “Some of the exposures will be attractive, interesting solutions. Others will probably be gimmicky.”

BondBloxx is looking to tap into an already rapidly growing corner of the nearly $10 trillion ETF universe. ETFs holding CLOs, which are bonds backed by leveraged loans that pay oating rates, already command more than $15 billion after the rst such fund launched roughly four years ago. The arena is lead by explosive growth in the $12 billion Janus Henderson AAA CLO ETF (ticker JAAA).

So-called private credit CLOs — similar to middle-market CLOs — are heating up as well. Roughly $25 billion of the more than $130 billion of new CLO issuance this year has been in such deals, according to data compiled by Bloomberg.

Tickers and fees are not yet listed for the BondBloxx fund. 

forms could approve our ETFs for clients,” said James McConaghy, head of distribution for Sound Income Strategies. “On Day 1, we saw spreads come down signi cantly.”

McConaghy has biweekly calls with Tidal Financial Group, the white label ETF rm that provides the platform for Sound Income Strategies and 61 other issuers, collectively managing 172 ETFs and nearly $20 billion in assets.

“The growth of actively managed ETFs as well as multiasset-class products has de nitely made ETF market making more complicated,” said Michael Venuto, chief investment of cer at Tidal Financial Group. “For complex products, a

EXCHANGE-TRADED FUNDS

more dedicated support system can be bene cial.”

Of course, the additional support has a cost that can range from $10,000 to $20,000 more per ETF annually for the designated market maker program. Launching an ETF on the NYSE oor, as opposed to switching from another exchange, can add another $20,000 or so to the initial listing fee.

To some, that cost is de minimis if assets rise signi cantly.

Within the complexities of ETP listing and trading, each exchange has programs and incentives designed to attract issuers and market makers.

“Sometimes maker-taker doesn’t

move the needle,” said Robert Marrocco, vice president and global head of ETF listings at Cboe. This is the traditional scheme by which an exchange offers a rebate to market-making rms that add liquidity by posting orders. Since 2016, Cboe has continually re ned its own liquidity incentive program and moved to a stipend-based model that compensates market makers for improving market quality. The market makers have to “tighten up the spread and provide more depth on the book” to earn the stipend, Marrocco said.

Similarly, Nasdaq has a designated liquidity provider program to encourage tightness and depth. The

exchange enhanced the DLP program in 2021 with a market-maker stipend focused on newly-launched or thinly-traded products.

“The role of an ETF market maker is pivotal in order for ETFs to trade ef ciently and for all types of investors to receive the best executions,” added Alison Hennessy, head of ETP listings at Nasdaq.

While the NYSE oor program has attracted roughly 1% of current U.S. ETP listings, including some from Cboe and Nasdaq, as well as NYSE Arca, the surge of new issues and the scramble for ETF assets has the entire marketplace thinking about how to improve the investor experience.

Morningstar Sustainalytics + Morningstar Indexes

HEDGE FUNDS

Hedge funds are diving deeper into a hot area: private credit

Managers using acquisitions as well as expanding the class’ traditional horizons

y B LYDIA TOMKIW

Hedge funds have long invested in a wide range of credit, but in recent years amid the boom and rise of private credit, many have also decided to dive deeper into the asset class.

Credit as a broad hedge fund strategy remains popular among allocators. It was the second-most popular type of hedge fund strategy investors (37%) said they planned to make an allocation to in the second half of 2024, behind equity at 61%, according to a September BNP Paribas prime services survey of 197 hedge fund allocators.

Private credit has seen rapid growth in recent years, becoming a $1.7 trillion segment, according to data from Preqin.

“Private credit can play a role in underfunded plans as well as funded plans. And so that actually makes it super interesting,” said Sona Menon, head of the North American pension practice and outsourced CIO at Cambridge Associates.

Menon looks for several factors when evaluating hedge fund managers adding private credit to their lineups. “You want to make sure that they have the subject matter expertise and the right team to be able to do that, to execute on it,” she said.

She added, “one of the things we look at when we look at private credit managers is their ability to be differentiated, whether that comes through their networks, whether that comes through their deal ow, whether that comes in origination capabilities.”

Following the nancial crisis in 2008, several hedge funds created vehicles to lend to ll the void left with regulatory changes, said Tim Ng, a senior consultant at Fiducient Advisors.

But unlike the early days of the hedge fund industry where two people in a garage with a Bloomberg terminal could start a fund, entering private credit requires building out infrastructure and hiring experts in areas including deal sourcing and underwriting, he added.

“How many good hedge funds are there…that are doing this that are good and how many are Johnny-come-lately’s who are trying to get into the business because it’s the hot dot and being chased by institutional investors?” Ng asked.

Several rms have pushed deeper into private credit and are doing so

in different ways from acquiring businesses to building out internal teams and strengthening existing credit capabilities.

The acquisition route

Man Group, which has invested in credit for decades, last year acquired Varagon Capital Partners, a U.S. middle-market private credit manager with $11.8 billion in assets under management at the time.

“On the investor side with rates where they are now, it’s far more attractive actually to invest in both xed income and credit strategies, and so we’re seeing investors change their asset allocation towards credit and then change it within credit to favor private strategies vs. market or public liquid strategies,” said Eric Burl, Man Group’s head of discretionary.

Man Group, which managed $178.2 billion rmwide as of June 30, is on the lookout for new capabilities that could come from an individual hire, a team lift-out or additional merger and acquisition activity, and Burl said must-haves he looks for include an investment process that can deliver outperformance, an investment team that can be underwritten and trusted, and cultural t.

“We still have ambitions to try and identify new strategies with a particular focus in the U.S. And we like the U.S. because...the depth and liquidity in the market, so we can invest at scale,” he said.

Europe, including the U.K., is second on the list. “We’ll spend more time here thinking about how we sort of semi-organically grow and add individuals and teams to continue building out both on the public, but more so on the on the private side here,” he said.

And adding private credit capabilities could lead to synergies in other areas. Burl offered the example of Varagon speaking with other teams that work on broadly syndicated loans and CLOs, so as companies move from private loans to the broadly syndicated market, there could be a way to capture more of their life cycle.

Burl doesn’t see a slowdown in demand for private credit.

“It’s de nitely fair to say that client demand hasn’t wavered, and I expect that to be persistent for many years,” he said.

Investors bullish on hedge funds

Another vehicle

The de nition of private credit has evolved since the global nancial crisis, and Hildene Capital Management co-CIO Dushyant Mehra says for him it encompasses everything that the banks have left a vacuum in.

“I would argue that structured credit investors have been in the private credit space since we’ve been investing in structured credit. So asset-based lending has always been part of the repertoire of what we’ve done across our careers,” he said.

Hildene launched in 2008 and was doing private credit investing in its hedge funds, Mehra said. The rm of cially launched a private credit business in early 2022 with a focus on housing, especially nonquali ed mortgage lending, and has a strategic relationship with CrossCountry Mortgage. Hildene manages $15.2 billion rmwide and its private cred-

it business has $194 million in AUM.

“Hildene has historically had hedge funds. That’s what we were founded out of. But a lot of what you’re doing in the hedge fund, effectively, is private credit,” said portfolio manager Justin Gregory. “It’s what people have branded as private credit today.”

Having a private credit structure gives the “ability to get more concentrated in it, supersize it, form a relationship with the underlying originator…and then do it in another vehicle, which is a longer-duration vehicle, which is meant to hold the equity of those securitizations,” Gregory said.

And being active in both hedge funds and private credit drives ideas in both, Gregory said. “What we do with hedge funds is driving new relationships that we gure out in the private credit side,” he said.

With partnerships, evaluating several tenets is key, including are capital markets strong and will they be into the future, having control of the credit and understanding it and having a pricing advantage, Mehra said.

“There’s a lot of private credit funds that have been raised, but not a lot that are competing in the markets that we are looking at,” Mehra said. “So, there will always be opportunities because there is growth of capital at the end of the day, there’s a big vacuum to ll that the banks have left behind.”

King Street’s synergy Launched in 1995, King Street Capital Management was founded as a hedge fund focused on distressed debt. Over the years, the rm has invested across credit including performing, stressed,

‘SUPER INTERESTING’: Cambridge Associates’ Sona Menon

The largest hedge fund managers

2

8

HEDGE FUNDS

Dmitry Balyasny on talent and the ‘very interesting’ time for stock picking

Founder of the eponymous rm ponders lessons learned over the last 23 years, and what’s ahead

y B LYDIA TOMKIW

Dmitry Balyasny predicts the ght for talent “stays hot” in multistrategy hedge funds as long as returns remain steady and rms continue growing.

“What’s been happening is somewhat similar to sports teams, where the percentage split between the owners of a ball club and the players hasn't really changed that much, but the salaries have gone up a lot, right? Because the value of the teams has gone up a lot,” he said. “So the numbers are just bigger … it’s the same thing in funds.”

Balyasny co-founded his eponymous rm, Balyasny Asset Management, in 2001 along with Scott Schroeder and Taylor O'Malley, and serves as CIO. The multistrategy, multi-portfolio manager hedge fund runs approximately $21 billion in assets. Today the rm has 170 teams across strategies including long/ short equities, equities arbitrage, macro, systematic, commodities and growth equity and over 2,000 employees globally.

Over the last 23 years, the multistrategy hedge fund sector has grown tremendously and today is the industry’s second-largest strategy segment after long/short equity funds and accounts for over $700 billion in assets, according data from Nasdaq’s eVestment.

Balyasny, who has a calm demeanor and precisely answers questions, has had a front row seat to all the changes. His own rm started with $40 million in assets under management.

Balyasny said during a recent interview at the rm’s New York of ce that his rm's growth is “governed by our ability to put up consistent alpha returns ... and then you earn the capacity to grow a little bit again the next year."

To him, it makes sense that multistrategy funds could become the largest percentage of the industry, “similar to what you see in private equity and other businesses, where there’s a lot of consolidation and most of the AUM eventually goes to half a dozen rms that are good at managing strategies as opposed to running one strategy,” he said.

Balyasny said his focus is on putting up good returns, and part of that is conducting capacity exercises several times a year. “We’re closed, and we’re really trying to optimize the return on the capital that we have. Whenever we have some gap between where we’re modeling out the capacity and what we’re running, then we open up for a little bit,” he said.

Balyasny’s agship Atlas Enhanced Fund was up 5.5% through June, according to numbers viewed by P&I The PivotalPath multistrategy index was up 6.1% through June.

Atlas Enhanced returned 2.7% in 2023, 9.7% in 2022, 7.8% in 2021 and nearly 34% in 2020. The rm had a bad year in 2018 when it lost over 6%.

It has returned an annualized 12% since inception in January 2006.

Concern over leverage

One concern institutional investors have raised about multistrategy funds is the amount of collective leverage they use and what would happen if a large-scale deleveraging event occurs.

Balyasny said there is a risk, but he thinks about it more as a correlation risk. “There’s no investment strategies that I’m aware of that doesn’t have correlation to multiple other shops doing the same strategy,” he said. Diversifying portfolios by strategies, positions, teams, and tight risk constraints are key, he said, pointing out that within the rm’s macro strategy there are 10 different substrategies.

“There’s no foolproof answer to it,” he said. “You have to risk-manage, and you have to react to what’s going on in the markets. From an industry perspective, everyone has pushed out their liquidity (with longer lockups). So, I think all the larger rms have multiyear liquidity. So even if there is a real industrywide drawdown shock at some point, which I’m sure there will be someday, the ability of rms to weather that is much better today than it was before.”

Fifteen years ago, when hiring for equity portfolio managers, nding a quali ed person who ran $300 million was great. Now “you’re hiring folks that run $3 billion. So, of course, they’re going to get paid more if they do well,” Balyasny said.

Last month, Bloomberg reported that Balyasny is set to spend over $200 million to recruit senior money managers who may have worked at rival rms including Citadel, Millennium Management and Point72 Asset Management.

Balyasny says his rm typically spends about 1% of assets under management annually on talent acquisition.

“In percentage terms, the amount that we spent on comp has been very consistent over the years,” he said. “Maybe it’s gone up a tiny bit, but very, very consistent. But the fund is ve times bigger than it was 10 years ago.”

He added, “We’re not the biggest player in our corner of the industry … We’re never going to win because we’re going to pay a lot more than a larger competitor. They can always, and in most cases do, pay a lot more than we do.”

Balyasny typically has two to three job interviews scheduled a day during the fourth and rst quarter of the year, he said.

Recruiting is “essential to busi-

ness building and just making sure we have the best possible people in every seat. So, I spend a lot of time doing that,” he said.

Personal journey

At 18, Balyasny got his foot in the door in nance with a job at a brokerage rm in Chicago. “I knew I wanted to invest and trade,” he said. And by his early 20s, he ran a small group within the brokerage rm.

“If we can nd somebody who, in addition to that (being a good portfolio manager in their own right), really has business-building DNA, where they can build a signi cant team over time, maybe they can run a division, maybe they can run an of ce, maybe they can run a strategy, that's really signi cantly more upside,” he said. “And so, we look for ambition and evidence of that … even if it’s at smaller scale.”

Balyasny focuses a lot on the psychology of individuals to understand if they have a good mix of con dence and humility to take meaningful risk but also have a exible mindset.

“We look a lot for people that have overcome dif cult challenges and circumstances over time, so that they’re resilient,” he said, adding, “markets are tough.”

The day Balyasny met P&I he was up at 5:30 a.m., and after dropping his kids off at their rst day of school, he had an equities portfolio manager meeting, attended a trading and markets discussion, an investment committee meeting, two portfolio manager catch-ups, and then trading until the market close and a business meeting. It was unusual that he did not have a recruiting interview that day, he said.

“When we started, the vast majority of my business-building was directly trading in the markets,” he said. “Now I still do that, but I’d say the bigger in uence is on working with the leaders of different areas to build businesses within the business.”

Stock-picking environment

Balyasny’s roots are in long/short equity investing, and today that makes up 40% to 50% on a risk-adjusted basis of the rm’s investing depending on the opportunity set, he said.

“Stock picking right now is very interesting,” he said, adding that investors can add a lot of value when there’s a lot of change happening.

“Between all the AI and technology changes, on the one hand, all the macro, interest rate, recession-no recession changes, and the election now, you’re going to have a lot of change,” he said. “And so every day there’s fresh data points, there’s a lot of surprising news, there’s a lot of technology developments.”

Balyasny said it’s “very hard” to make large bets on the U.S. election because of the inherent uncertainty around the result and how markets will react to the outcome.

“People might take slight tilts here and there if they feel like it’s a some-

what asymmetric outcome in a particular investment. But, overall, we just try to kind of stress manage to make sure we don't have too much tail risk in any particular outcome,” he said.

In the near term, Balyasny thinks that AI will be a strong research assistant for investors.

“The further out levels, I think, are harder, right, because at some point can the AI become smarter and gure out which questions to ask, ask the questions and come up with its own conclusions which are actually worthwhile? You would think the answer to that eventually is yes, but we have no idea if eventually is in a couple years or in 20 years or in 200 years,” he said.

As new iterations develop, Balyasny imagines AI could go from an assistant to a good junior analyst and maybe even one day a senior analyst.

“I don't know how long it’ll take to be a good portfolio manager. My guess is a long time,” he said. “Because the rules for what makes stocks go up and down, outside of extreme circumstances, you know, change quite a bit.”

Amid all the change, institutional investors have the same concerns they have had historically, Balyasny said.

“Being an institutional investor is a challenging thing, because you're trying to constantly nd really uncorrelated alpha at a meaningful enough scale to make a difference to a large pool of capital. And that's hard to do,” he said. “There’s just not that many great sources of alpha that have lots of capacity. And so, you know, I think they’re always concerned rightly so about the correlation in their portfolios.” About 70% of

Balyasny's assets are managed for institutional investors.

Finding investments that don’t have easily replicated factors and are not limited by capacity is difcult, he said.

“We’re doing that all the time — trying to nd new teams that are bringing something different to the table, and trying to build out businesses and infrastructure around them to create a sustainable moat around their strategies,” he said. “And you know, we do that with the bene t of several thousand people, and it’s still very hard.”

Fees and cash hurdles

In recent months, a large number of institutional investors and consultants have signed on to a letter demanding cash hurdles with hedge fund fees. Multistrategy funds have employed a pass-through fee structure where managers pass along expenses to their underlying investors.

Balyasny says investors want to make sure they are aligned with their managers.

“I think the pass-through structure is the most aligned structure that there is because the management company doesn’t really make any signi cant money until everyone else has been paid. And so you’re very aligned with wanting to have the best possible teams in every area, but you don’t want to overpay them because you’re just cutting your own compensation, your own ability to deliver good net return,” he said. He added, “it governs your capacity because the vast majority of your earnings are from your net incentive fee. And so if you’re just going to take on a lot more assets, you’re just going to make less money at the end of the

day. So it’s actually much more aligned than I think virtually any other investment structure is.”

Balyasny’s start in the hedge fund industry came after he read a newspaper ad that led to a job at Schonfeld Securities. While cold-calling and answering job ads worked for him, he said it is not a “scalable” method for students interested in careers in nance who want to break into the industry but have no connections.

“The industry misses out on some really smart kids,” he said. It led him to launch the Atlas Fellows Program that offers scholarships and paid internships withnancial services rms, including Balyasny, to students interested in careers in nance. The program has over 100 students and the rst group will graduate next year.

And Balyasny is focused on talent at all levels. This year, his rm had 125 summer interns and is doing more recruiting for students straight out of undergraduate programs, Balyasny said.

Balyasny grew up in what was then Soviet Ukraine, and at age 7 in 1979 his family immigrated to the U.S. from Kyiv during a period of large-scale Jewish immigration from the former Soviet Union. They landed in Chicago not speaking any English. The immigration experience and early years in a new country built his resiliency, he said.

“It gives you a certain drive because you start without much, and everyone you know is in the same position,” he said. “And the only way you kind of get to a more a comfortable life where you’re not worried about how you’re going to pay the bills this month is you really have to

step up and achieve something. So there’s like an inherent kind of drive and grit that is dif cult to teach.”

And those lessons also translate to markets, Balyasny said.

“There’s a lot of times where whatever you used to do stops working. You have to gure it out, whether that’s somebody’s individual trading or building out a new business or a new strategy, or your overall fund ... they constantly need to be iterated and reinvented and approved. And you need a lot of perseverance to do that over, you know, many, many years.”

Russia’s February 2022 full-scale invasion of Ukraine created knockon impacts across global energy and commodities markets. At the time, Balyasny Asset Management had a fairly new commodities business and Balyasny said there were opportunities due to wild moves and dislocations in commodities markets.

“I think markets have sort of gotten used to it,” he said. “We still do a lot of stress testing for various escalations … but now it’s less of an issue from the market standpoint.”

Balyasny, who no longer has any family in Ukraine, returned once about a decade ago for a visit with his family. Both he and his rm made charitable humanitarian donations at the outset of the war, he said.

He said his best guess to how the current war ends is that eventually a settlement will be reached.

The next 10 years

Over the next decade, Balyasny plans to build a more diverse rm.

“Today, I’d say we have a few topnotch businesses and a lot of newer businesses. And I think in 10 years, we want to be known as amongst the best in every strategy that we're in,” he said, pointing to equities and macro as established, mature businesses that make up two-thirds of the rm. Emerging strategies include commodities, systematic and equity arbitrage businesses, he said.

For some strategies, such as agricultural commodities for example, it is “very dif cult to have an independent fund,” Balyasny said, pointing to the infrastructure, technology, data and weather teams needed as well as the volatility investors must tolerate.

“It’s just a very hard separate business. So strategies like that where there’s a lot of seasonality, right? There’s big chunks of the year where there’s just a lot less to do than other parts of the year,” he said, adding “when it's part of 170 teams, it’s great because it’s totally uncorrelated. You can allocate capital, more capital, when there's more opportunity.”

“We might make changes at the PM level. If somebody’s not performing for an extended period of time, we might make changes in the approach and iterate the strategy,” he said.

“But the only way you build a moat and really deliver consistent, high, Sharpe returns is you have to be in these businesses for decades, and you just get better and better at it every year. And they take a long time to really build a real competitive advantage in something.”

BAM now has 20 partners and Balyansy wants to add more over time.

At 52, Balyasny has no plans to slow down or retire.

“I foresee more senior folks running large portions of the business,” he said. “But I don't intend to go anywhere for a while.”

Hedge fund data bank

Source:

Returns

has cash to put to work — that are in the driver’s seat.

Approximately 70% of multimanager hedge funds have done some form of external allocation, according to a Goldman Sachs September prime services report on the multimanager landscape. Goldman Sachs de nes multimanager rms as rms "with multiple, autonomous risk-takers (usually at least 10 portfolio manager/teams but often considerably more) amongst whom capital is centrally allocated. Many of these rms are multi-strategy, but others apply the model to single strategies." The report encompassed 53 rms with total assets of $366 billion at the end of June.

The external allocation gure is gaining pace, up from slightly over 50% in 2022, Goldman reported.

What’s new now is there are fewer stand-alone seeders and breakeven rates are higher with hedge funds needing to reach around $500 million these days, said Rob Christian, CIO at K2 Advisors, a fund-of-funds subsidiary of Franklin Templeton.

“In short, it’s harder and harder to launch hedge funds today,” he said.

Amid the hot talent war, external allocations allow hedge funds to tap a pool of talent that wants to run their own rms and also give access to strategies that can have high infrastructure costs.

A big shift over the last ve years has been the decline in new hedge fund launches, said Joe Dowling, senior managing director and the global head of Blackstone Multi-Asset Investing, with $80 billion under management as of June 30. The barriers to entry have increased with higher startup costs, increased regulation and needing to reach an efcient scale, he added.

“Hedge fund launches is where new talent is showcased to the world,” he said, noting he keeps a list of superstar investors who one day may want to launch their own rm. “It’s a compelling opportunity set.”

The growth of multistrategy hedge funds, both in terms of assets and headcount, have been another disruptive force, he added.

That growth now provides a new avenue for talent, spinouts as well as potential partners to acquire groups

HEDGE FUNDS

that were incubated or seeded elsewhere, sources said.

Despite the changes, Dowling said it’s one of the best environments he has seen in a long time to seed hedge funds and there are fewer seeding rms in business these days. Blackstone has made over 30 seed investments since 2007.

In a recent example, reported by Bloomberg, the C$646.8 billion ($476.5 billion) Canada Pension Plan Investment Board and a unit of Singapore’s Temasek Holdings followed Blackstone in seeding Arrowpoint Investment Partners, a new launch coming from Millennium Management’s former Asia co-CEO, Jonathan Xiong.

“Launches are a very good place to look for new talent, and economically you are shing in a pro table pond,” Dowling said.

Any negative connotation of investing in outside managers has gone away and hedge funds are increasingly being public about it, said Jon Caplis, CEO of PivotalPath, a hedge fund research rm.

“There are very few funds we speak to now that aren’t investing outside,” he said.

Of the 147 new hedge funds that have launched or will launch from the start of this year through the sec-

going to long/short equity strategies, especially sector specialists, followed by quant strategies.

Sources told Pensions & Investments that among the most active rms in the space are Boothbay Fund Management, Millennium Management, Paloma Partners Management and Schonfeld Strategic Advisors.

External allocations can take many shapes and have different terms and exclusivity arrangements.

Goldman Sachs noted that overwhelmingly they are being made in the form of separately managed accounts, or SMAs, “which allow multimanagers the ability to retain full transparency and control, impose risk limits and preserve capital efciency by cross-margining external managers against internal PMs.”

And while external allocations have grown in recent years — they are not entirely new.

Paloma famously backed D.E. Shaw in the 1980s, which today is one of the industry’s largest hedge fund managers. More recent examples have included Quantessence Capital and Ritter Alpha.

“We support managers in the way that best optimizes outcomes for both parties. Our platform offers a low-risk operational framework for managers focused solely on invest-

Investors are ‘actively looking for strategies to seed because they believe if they can get in with a good team, when the track record is young . . . they’re going to perform better than if they come in after that.’

MERCER’S RICH NUZUM

ond quarter of 2025 that are spinning out from funds with more than $1 billion in assets under management, 53 of the launches are coming from multistrategy hedge funds, according to PivotalPath data. And among the 147 new launches, there are likely to be ve new multistrategy rms.

The Big Four

Four hedge funds account for 75% of the external allocations that Goldman Sachs has tracked. And just over half of external allocations are

similar,” he said.

Having a dedicated strategy, Testerman said, is also important when thinking about deploying capital into private assets.

rate, structured, asset-backed and real estate, said Ed Testerman, a partner on the U.S. research team.

“We thought that it made a lot of sense and was very synergistic with the existing business to launch our private opportunistic credit business. And so that was a big part of the rationale,” he said.

In 2022, the $26 billion rm launched a dedicated private credit strategy and today has over $1 billion in opportunistic private credit assets under management.

“There’s a lot of track record and experience that you can leverage because, yes, you’re providing longer duration capital, but at the end of the day, the same underwriting and structuring acumen that is required to think about or invest in a stressed liquid credit is not so dis-

And Testerman said being able to use the skill sets of an entire credit platform is a key differentiator.

“It allows us, from a sourcing perspective, to leverage the relationships that we have across the entire rm,” he said. “There’s no competitive tension, as we think about being able to leverage our sponsor relationships and leverage our adviser relationships, and we can work with our CLO team to identify issuers that may have a capital need where we can reverse into them with a private solution.”

LibreMax’s evolution

Greg Lippmann, CIO and founder of LibreMax Capital, started his rm 14 years ago with a hedge fund and the goal to grow into a diversi ed, securitized credit manager. Libre-

managers for whom they are their rst allocation and actively help them set up, as well as to established rms. Boothbay primarily allocates to external managers via SMAs, but also through other structures and arrangements. Examples include Oribel Capital Management, Electron Capital and Statar Capital.

“We consider ourselves an alternative to traditional seeders, primarily because we allocate via SMAs rather than into commingled funds. Additionally, traditional seeders typically demand a share of manager revenue, often in exchange for a multiyear allocation lockup. We take a different approach, negotiating fee discounts and capacity rights, without asking for a piece of a manager’s business,” Weaver said in an email.

ing, while our SMA business provides early-stage capital, along with risk and operational oversight, for those aiming to eventually establish their own rm,” said Ravi M. Singh, chief strategy of cer at Paloma, in an email “This exibility positions us well to attract the best talent.”

Boothbay has been one of the most active rms with external arrangements numbering in the hundreds over the rm’s lifetime, according to Michael Weaver, the rm’s chief operating of cer. Boothbay, with $2.3 billion in AUM, allocates to

Max has approximately $10.5 billion in assets under management including $1.1 billion in private credit and asset-backed nance.

As private credit has grown, additional skill sets were needed. “You need a lot more document negotiators for private credit,” he said, noting that they have added people as they have expanded.

Growing into different areas has also had bene ts. “What does happen is the knowledge we have from the securitization market helps on the private credit pre-securitization side of the business,” he said.

Lippmann is expecting to see investors turn increasingly to other areas of private credit in coming years.

“As the broader private credit market has matured and as people’s allocations to that space have grown there has been more interest in looking at asset-based nance,” he said. “There is a lot of interest in asset-based nance today, even com-

He added, “This better aligns with our investor’s interests. Our approach enables us to grow with our best managers at preferential fee terms as a reward for having been an early (or day-one) allocator, without being locked into managers that no longer t our portfolio.”

Key attributes

Boothbay looks for several key attributes when evaluating managers including pedigree, investment performance, investment philosophy, repeatability of process, risk management and edge.

Weaver said using SMAs provide several bene ts including tailored investment and risk limits that can

pared to ve years ago.”

Third Point staffing up Daniel Loeb’s hedge fund Third Point said earlier this year it would invest in private credit. Loeb, speaking at a conference in May, said it was a “bond and credit pickers mar-

be monitored on an ongoing basis, full position-level transparency, capital ef ciency and leverage, and asset custody and operational control. They can also be customized based on circumstances, such as risk-customized version with lower beta characteristics and tailored risk limits. Boothbay in some cases asks for full exclusivity for a period, but will also pursue limited exclusivity (requiring that they be the manager’s sole SMA) arrangements and nonexclusive arrangements.

“Boothbay’s priority is partnering with attractive alpha generators, using whatever structure works best for the circumstances,” Weaver said. “This exible approach, in contrast to the ‘one-size- ts-all’ employment structure favored by many peers, helps us attract top talent.”

Millennium has also been active in the space with examples including Helix Partners, Kodai Capital Management, Burkehill Global Management, Taula Capital and Sone Capital Management. Bloomberg rst reported that such arrangements make up approximately a tenth of the Millennium’s trading teams. A spokesperson for the rm declined to comment.

Schonfeld has also long backed external partner funds on an exclusive or semi-exclusive basis. A famous example includes Dmitry Balyasny’s Balyasny Asset Management. Other examples include Aster Capital, Meridiem Capital Partners

ket” with many stressed opportunities to examine. As of Dec. 31, the rm managed approximately $10.4 billion on a discretionary basis.  Third Point has brought on Chris Taylor, Jennifer Cotton, Sunil Mehta, Mikhail Faybusovich and Matthew Ressler for its private credit effort. A spokesperson for the rm declined to provide further details on the effort.

Greg Coffey’s Kirkoswald Asset Management, which has about $8 billion in AUM, made its rst private credit move with a senior secured loan to a Turkish textiles exporter, Bloomberg reported in August. The rm hired Alex von Sponeck and Simon Watt as portfolio managers for private credit. A spokesperson for the rm declined to provide more details on the rm’s efforts.

Corbin Capital Partners, which has evolved into a broader alternatives manager from it hedge fundof-funds roots, rst launched its

GROWTH BRINGS BENEFITS: LibreMax Capital’s Greg Lippmann

‘COMPELLING OPPORTUNITY’: Blackstone Multi-Asset Investing’s Joe Dowling

and Parkman Healthcare Partners. A spokesperson for the firm declined to comment.

Sources also pointed to ExodusPoint Capital Management and Verition Fund Management as employing external arrangements. The firms did not respond to a request for comment.

Other firms have not been as active in the space and have done only a few examples of external allocating.

Ken Griffin’s Citadel provided backing to Candlestick Capital, launched by a former Citadel portfolio manager, in 2019. A person familiar with the firm’s thinking noted that external manager arrangements were outside of Citadel’s DNA as a firm. A spokesperson for the firm declined to comment.

Balyasny has made external investments in Landmark Investment Partners and Sparta Capital Management, the latter of which it later withdrew from. A spokesperson for the firm declined to comment.

Point72 Asset Management made an investment in Blue Swell Asset Management. A spokesperson for the firm declined to comment.

Electron Capital, an approximately $3 billion long/short equity manager, has offered SMAs alongside a commingled fund since its launch in 2013.

“The evolution of SMAs in the hedge fund world over the last decade has been transformative. Once a niche offering, SMAs have become a cornerstone of institutional investment, reshaping the landscape of alternative assets,” said Greg Zaffiro, a partner and head of investor relationship and business development and marketing at Electron, in an email.

Many hedge fund managers “now view SMAs not as distinct products, but as ‘access vehicles’ to their core strategies. This approach allows them to maintain investment consistency while meeting diverse client demands,” he added.

Zaffiro pointed to many reasons why investors may want an SMA including to fit specific investment mandates, risk tolerances and regulatory requirements.

And the SMA trend “shows no signs of slowing,” Zaffiro said.

Full transparency

Neal Berger, chief investment officer at Eagle’s View Capital Management, a longtime allocator to multistrategy hedge funds, said he is

private credit strategy in 2014 and has a focus on niche areas including secondaries and specialty finance. The firm has approximately $9 billion in total AUM.

And Magnetar Capital, with approximately $17.5 billion in AUM, is pursuing a broad range of credit investment areas. Its website lists a variety of areas from automotive lending to music royalties.

Entering segments of private credit, such as asset-based lending, requires specific tools and technology in addition to specialists with track records, said Darius Mozaffarian, president of White Oak Global Advisors, a private credit firm focused on small and middle-market businesses.

“No. 1 you need capital. In order to, in my opinion, be successful in private credit you need to be able to have a diversified book and the capital to write a large check so you don’t have concentration issues,” he said.

fine with multistrategy funds making these types of allocations.

“It’s really no different from investing with internal managers and passing through the (compensation) to investors. Given today’s ultra-competitive landscape for talent, funds are trying to source top talent wherever they can,” he said in an email. “If investing through an SMA or an exclusive, the multistrat in most cases is able to garner full transparency into the underlying positions and therefore, manage the allocation in the same manner as they do their internal traders.”

OCIO firm Partners Capital has an early stage anchor program for providing capital to hedge fund managers who are in the process of starting a new firm or are looking for strategic partners or launching new products, said Sam Diedrich, a managing director and head of absolute return. The firm is backing approximately 20 managers a year, he added. A recent example was backing Corbiere Capital, according to a media report.

Diedrich said Partners Capital, like multistrategy funds, is focused on this because of talent.

“If you can augment an employee-type relationship model, which is the traditional model of multistrats, with an external model with very high quality PMs, that's something that certainly warrants looking at in order to just satisfy the demand for new talent every year. So I think that's those are some of the dynamics that are really driving this shift and now this different focus,” he said.

Rich Nuzum, executive director of investments and global chief investment strategist at consultant Mercer, expects to see multistrategy hedge funds continue to grow.

“I think the multistrats are innovating,” he said. “‘Well, we won't hire a team. We’ll seed your firm.’ And seeding of strategies is an area of innovation across alternatives. Some of our largest, most sophisticated, sovereign wealth fund clients, family office clients, endowments… even U.S. public funds. They're actively looking for strategies to seed.”

He added that investors are “actively looking for strategies to seed because they believe if they can get in with a good team, when the track record is young and they don’t have a lot of assets under management, they’re going to perform better than if they come in after that.”

How the survey was conducted

Pensions & Investments annually surveys institutionally oriented managers to collect data about their worldwide and institutional assets managed in hedge funds as of June 30.

The 2024 survey marks the 15th year P&I has gathered data from hedge fund firms for this report, one of P&I’s most popular annual manager features.

In a small number of cases, P&I obtains hedge fund assets under management worldwide from a company source such as a spokesperson, website or financial report.

Hedge fund assets do not include mutual fund or UCITS assets that are managed using a hedged strategy, or hedge fund of funds. n

Bridgewater, GIC execs discuss U.S. ‘exceptionalism,’ AI, China

y B SOPHIE BAKER

U.S. exceptionalism, artificial intelligence and China’s economy are three areas that investors will need to grapple with in the years ahead, according to Singapore sovereign wealth fund GIC, and the world’s largest hedge fund, Bridgewater Associates.

The sovereign wealth fund, which does not disclose assets but is estimated to have about $770 billion, and the $108 billion hedge fund manager collaborated on joint research projects to identify and assess the issues they think will be most important for investors in the coming years. The work was part of the 30th anniversary of the relationship between the two entities, according to Bridgewater’s website.

The U.S.’s exceptionalism should be split into economic and asset performance, said Jeffrey Jaensubhakij, group CIO at GIC, in a recorded discussion of the research published on both Bridgewater and GIC’s websites.

The economic factors are probably “structural and don’t change,” Jaensubhakij said, with a large domestic market for growth in terms of resources, size of land mass and population. That means “companies and businesses that grow in the U.S. actually can grow to a huge size, achieve great economies of scale, just in the domestic market without having to do anything internationally.”

The U.S.’s diverse population also fosters new ideas and innovation, he said.

Other areas of the U.S.’s exceptionalism are cyclical, such as the joint research showing that valuations have “really grown well beyond those of other countries, and well beyond the fundamentals, the earnings growth and so on.” There’s also still an additional valuation premium given to the U.S., Jaensubhakij said.

“These things historically have been quite cyclical, so it would not be surprising to see some of the exceptional performance on the asset price level actually erode over the

next decade or so,” he added.

Liew Tzu Mi, GIC’s fixed-income and multiasset CIO, and chair of the sustainability committee, said fiscal sustainability is also a key concern for the U.S. and other countries, and the question is what politicians will do to address it.

Regarding AI, “I think that the bubble’s ahead of us, not behind us,” said Greg Jensen, co-CIO at Bridgewater, in the same discussion. “I know it seems like there’s been a lot priced in, there’s a lot of euphoria around a lot of these things,” he said, adding that certain companies recognize the risk of not investing in advancements. “If you don’t stay ahead in AI, you’re done for,” Jensen said. Looking ahead, “many companies across many sectors will feel that if they don’t do that, they will fall behind — and that will radically change the investment thinking.”

In terms of potential future investment opportunities related to AI, GIC highlighted companies that can adapt large language models to their own businesses and what they’re trying to do.

On China, the trio discussed changing demographics and how the impact of deleveraging in the real estate market, for example, are having significant effects on the econo-

my. Real estate was 26% of gross domestic product in 2020 — that figure was 17% as of 2023, Liew said. “And the property market also has very large knock-on impacts in terms of the credit chain,” she said, such as in consumption and demand for commodities. “This structural adjustment is going to take some time, because it’s very difficult to find something like a real estate contribution that can replace in terms of (a) growth engine for the Chinese economy in a short period of time,” she added.

Finally, the trio discussed sustainability, with GIC’s Liew explaining that, using the MSCI All-Country World index as a proxy for the global investment universe, the “green bucket” — sustainable assets — constitutes about 7% of assets and is where GIC wants to put capital for developments. Stranded or high-carbon-intensity assets account for about 10% of the index — “but, by the way, they are responsible for something like 40% of the whole index WACI” — or weighted-average carbon intensity. GIC will choose to divest if no transition is planned.  Everything in the middle, 83%, is the “transition,” where “the work is quite complex because it’s very nuanced,” Liew said.

HFR launches index to track $425 billion multimanager, pod shop hedge funds

Hedge Funds y B LYDIA TOMKIW

HFR has launched a new hedge fund index to track one of the most highly watched areas of the hedge fund universe: multimanager pod shops.

The HFRI Multi-Manager/Pod Shop Index debuted Sept. 9 and the index was up 1.57% for August driven by equity and fixed income trading after a volatile month that included the unwind of the Japanese yen carry trade. The index is now up 5.51% year to date.

The launch of the index was spurred by increasing institutional investor interest and investment in multimanager pod shop funds, said Ken Heinz, president of HFR.

“With the sustained increase in volatility over the last four years and

a growing propensity toward rapidly evolving micro-cycles, there is interest in these for the specialization and diversification they can provide, and at the same time for the institutional risk controls they are able to offer,” he said, in an email to Pensions & Investments

The new index is comprised of approximately 36 constituents that utilize a multimanager, pod shop structure.

HFR defines the multimanager strategy as fund capital being “allocated to multiple independent investment teams” with the pods being “autonomous” but generally operating “within certain portfolio management or risk guidelines” and with capital that “is allocated to or from these pods in a discretionary manner under the supervision

of a CIO.”

HFR estimates that multimanager hedge funds currently manage approximately $425 billion in assets. Equity hedge funds are the largest category at $1.3 trillion, according to HFR.

Multimanagers, such as the approximately $68.2 billion Millennium Management and $63 billion Citadel, have grown in recent decades to become some of the industry’s largest players managing billions of dollars and employing thousands.

Overall in August, hedge funds posted a 0.25% gain for the month with equity hedge and fixed income-based relative value arbitrage strategies leading the way, according to the HFRI Fund Weighted Composite Index.

AI BUBBLE AHEAD: Bridgewater’s Greg Jensen

A BIGGER UMBRELLA

"Sustainable investing” has entered the financial lexicon. More investors have adopted it as the preferred term to describe their approach to incorporating the material impacts of environmental, social and governance factors on their investments. But with the proliferation of diverse sustainable approaches available today, it can mean di erent things to di erent participants in the institutional investment world.

Thomas Kuh, head of ESG strategy at Morningstar Indexes, broadly defines sustainable investing “as an overarching category that includes climate, ESG and impact. Over the years, index and data coverage have gone from being on the country level to being global,” he said. “It’s also evolved through di erent phases from socially responsible investing, as it was initially called, to ESG. We’re now at a point where the urgency of climate change, climate risk and climate transition has come to dominate investors’ agendas.”

Focus on development

Rob Harley, analyst and portfolio manager at Stewart Investors, o ers a specific approach. The firm invests exclusively in the equities of high-quality companies that it believes are well positioned to contribute to — and benefit from — sustainable development. The latter refers to economic and human development that meet present and future needs without depleting the earth’s environmental resources.

Stewart frames its approach in this way because “we’ve learned from history that as countries have grown richer, their populations have also become healthier, wealthier, better educated and, up to a point, happier. But these human development gains

There are multiple ways to define sustainable investing — and multiple motivations to pursue it.

have come with growing wealth inequality and a huge environmental cost, as we’re using up natural resources 70% faster than nature can regenerate them,” Harley explained. “The world must find a di erent way of doing things, and we think sustainable investment can be part of that change.”

Several objectives

Why do asset owners around the world pursue sustainable strategies?

The reasons range from the purposeful (to make the world a cleaner, better place) to avoiding risks, such as the negative impacts of environmental issues, to the purely financial (delivering alpha). And many institutional allocators today pursue both purpose and alpha, alongside a more granular understanding of how to approach and measure their sustainable investment portfolios.

Asset owners are expressing themselves very clearly on this point, said Hortense Bioy, Morningstar Sustainalytics’ head of sustainable investing research. “We’re hearing from some asset owners that the current state of climate investing isn’t meeting their needs,” she said. “Some have criticized benchmarks aligned with the Paris Agreement and certain climate transition metrics. Paris-aligned benchmarks are a regulator-driven initiative that aims to reduce carbon in portfolios, but they’re quite constraining.”

Asset owners have two primary goals, Bioy continued: To provide capital to companies that o er solutions to climate change and to encourage corporate decarbonization. They’re more concerned about leveraging their position as large investors to foster real-world decarbonization than about their portfolios’ carbon exposure.

Resource Consumption Increases as Human Development Rises

Pablo Berrutti, portfolio specialist at Stewart Investors, cites several objectives that sustainable investing seeks to achieve. The first is simply to generate good performance. “Some asset owners focus on ESG ratings and sustainability considerations,” he said. “But ESG is usually just one of many criteria they use to make decisions. They want to know how we intend to generate attractive long-term returns and how our investment process connects with our investment philosophy to accomplish that.”

Berrutti also cited government reporting requirements as a reason why asset owners pursue sustainable strategies. The U.K. and New Zealand, for example, have mandatory climate change disclosures. Asset owners in those jurisdictions need their investment managers to deliver disclosure-friendly information.

Ultimately, Berrutti said, “asset owners’ motivation comes down to two things. One, How does the incorporation of sustainability enhance a manager’s investment process? And two, How can shareholders use their influence as stewards to encourage companies to improve their sustainability e orts, reduce risk and capture opportunities?”

DATA AND BENCHMARKING ADVANCE

Developments in sustainability data and the resulting products are moving fast – and need constant vigilance.

The world of sustainable investing continuously evolves as technologies, data and marketplace factors advance at a dizzying pace. While institutional allocators continue to follow the traditional approach to benchmarking — comparing the performance of their portfolio to that of a broad representative index — new and specialized sustainable benchmarks have also gained many adherents. Either way, it requires regular monitoring of innovations across the space.

Bioy of Morningstar Sustainalytics said, “Sustainable strategies are typically benchmarked against a broad-market index. But new strategies call for new indexes, which explains the rise of sustainable indexes over the last 10 years.” According to the Index Industry Association, there currently are more than 50,000 sustainable investment indexes.

“If you want to measure your sustainable strategy’s risk, return, ESG quality, carbon profile, etc., you need to compare it not just against a sustainability benchmark, but also versus the broad market,” Bioy said.

Institutions are asking sustainable index providers for more than benchmarks: They want data and insights that can enhance their analysis and decision-making.

Asset owners are focusing on how they should invest as the transition from fossil fuels to other energy sources unfolds, said Kuh of Morningstar Indexes. In the last year or so, the climate research team at Morningstar Sustainalytics has introduced its Low Carbon Transition Rating.

LCTR not only provides insights for investors on traditional metrics for carbon footprint, but also uses forward-looking data that examines companies’ net-zero plans and the related capital expenditures they need to make. “This gives investors a clearer sense of whether companies are actually following through on their net-zero plans and moving on to pathways that, in the future, will meaningfully reduce their carbon footprint,” Kuh said.

Not there yet

Asset owners and managers have long complained about the lack of standardization in the data, metrics and disclosure requirements used to evaluate sustainable investments. Some index providers believe that things are moving in the right direction, while acknowledging that true standardization will take years to happen.

ESG is usually just one of many criteria that asset owners use to make decisions. They want to know how we intend to generate attractive long-term returns and how our investment process connects with our investment philosophy to accomplish that.

- Pablo Berrutti Stewart Investors

“There’s more and better quality ESG data now than five years ago, because investors have engaged with companies to request that information,” said Bioy of Morningstar Sustainalytics. “But there is still no standardization because disclosure remains voluntary in most markets. This is changing, though. The European Commission has enacted its Corporate Sustainability Reporting Directive, for which the first reports will be published in 2025. The International Sustainability Standards Board has consolidated several standards into one that countries are starting to adopt as their mandatory framework.”

Standardization remains uncertain in the U.S., Bioy added. The Securities and Exchange Commission adopted a climate disclosure rule in March 2024, only to pause it in the face of political opposition. A federal appeals court will hear arguments on the rule’s legality.

Stewart’s Berrutti shares similar concerns: “To the extent we look into ESG data providers’ o erings and the substance of their data, we see a lot of variation and big discrepancies. Standardization seems a long way o .”

“We’re quite cautious, skeptical even, of ESG scores because measurement methodologies vary greatly among providers,” Berrutti explained. “It can be di cult to know

whether you’re comparing apples to apples. Often the scores seem to be based on the previous year’s data, and they get updated only annually. The data is also backward looking, which means it can’t take into account a company’s ambitions, future strategies, where it wants to go — which is the most important thing for us as investors.”

Focus on biodiversity

Index providers are actively creating new products that meet asset owners’ needs.

Kuh referenced Morningstar Sustainalytics’ Low Carbon Transition Rating as the basis of a new index. “We developed a benchmark to track carbon transition leaders that builds on the LCTR’s management assessment. It reflects not only the historical trajectory of these companies’ carbon profiles, but also where they’re going,” he said.

We can now collect and analyze information that wasn’t even available before and do it much faster than ever. This capability will fundamentally transform how sustainable investment is practiced.

- Thomas Kuh Morningstar Indexes

Institutions are expressing considerable interest in biodiversity, Kuh said, which is adjacent to, and intersects with, climate change — making it a greater priority for sustainability investors. “It’s fair to say that we should expect biodiversity to become increasingly important to investors concerned about transitioning to a low-carbon economy,” he said. “Climate change’s impact on biodiversity, in terms of species loss and depletion, is profound and has long-term ramifications.”

A BOTTOM-UP APPROACH

Sustainability must be integral to a company’s business model.

Equities manager Stewart Investors was founded in 1988 on the core principle of “careful, considered and responsible management” of its clients’ funds. Its commitment to sustainability in its bottom-up stock selection has been ironclad ever since.

Berrutti described the firm’s investment philosophy: “Sustainable investing means finding high-quality companies that are contributing to, and benefiting from, sustainable development, which means operating within environmental limits while contributing to human development, including the attainment of higher incomes, living standards, education and access to healthcare and technology,” he said. “Contributing to and benefiting from sustainable and human development must be core to the company’s business model because that is what will drive longterm value.”

Stewart’s investment approach is bottom-up and not driven by themes or macro factors. Harley said that company quality must go hand-in-hand with sustainability. “We consider whether every company has a management team that acts with integrity and takes a long-term view, a competitive and resilient franchise, and conservative financials,” he said.

Harley shared four key sustainability considerations used in stock selection. They include a company’s commercial proposition to o er products and services that solve di cult problems, meet important needs and help people do more with less; a low operational impact along its value chain; a committed sustainability ethos; and a context that’s positioned to benefit from evolving regulations and consumer preferences.

Attractive opportunities

Although Stewart is a bottom-up investor, there are certain sectors in which it tends to find appealing opportunities, including healthcare, information technology, software and digitalization, Harley said. The intersection of industry and technology is particularly interesting as well, he noted. Companies that formerly were straightforward industrial producers now use di erent business models. They’re seizing opportunities that arise because of digital connectivity, processing e ciency and automation.

Berrutti cites a couple of Stewart’s current holdings as examples of what it seeks in companies. “DiaSorin, an Italian diagnostics company, is using artificial intelligence to help develop its next generation of diagnostic tests,” he said. “One of these tests helps to separate bacterial infections from viral infections, which hadn’t been possible. If the test comes to market, it could reduce the overuse of prescription antibiotics, which reduces human resilience to diseases due to antimicrobial resistance.”

Another promising holding is an Indian company, Marico. “Marico makes healthy coconut-based products for skincare, shampoo and food,” Berrutti said. “It has a very tight and sustainable supply chain focused on those coconut products, engaging directly with farmers as it buys one in 10 coconuts across the Indian subcontinent. As Indian consumer standards of living increase and widen access to hygienic shampoos, soaps and the like, Marico should prosper.”

THE VIEW AHEAD

Sustainable investing is a hotbed of innovation across asset classes, though its shift into the mainstream may come in fits and starts.

Asset owners currently favor equities for their sustainable portfolios — but fixed income is gaining traction and appears headed for larger allocations.

Within sustainable fixed income, investors are most enthusiastic about green bonds, according to Bioy of Morningstar Sustainalytics. “Green bonds are at the intersection of climate, finance and impact,” she said. “Investors like them because they use quantitative metrics to measure how specific projects meet their environmental goals. Compared to public equities, they o er a better way to assess a sustainable investment’s impact.”

Private markets play a pivotal role in the climate transition, Kuh added. “They’re where a lot of the new and emerging technologies are being incubated. At Morningstar, we

have the benefit of access to private markets data through PitchBook. We’ll be increasingly taking advantage of access to that information to help investors think about where the new technologies are coming from and how the transition will be financed,” he said.

Innovative future

For Kuh of Morningstar Indexes, the big story is data as the foundation on which sustainable investing strategies are built. “We are in a world of big data, advanced computing capabilities and artificial intelligence. Our ability to gather and analyze new types of data is transforming business practices in many industries. We can now collect and analyze information that wasn’t even available before and do it much faster than ever — for example, geospatial data on biodiversity-sensitive areas. This capability will fundamentally transform how sustainable investment is practiced,” he said.

We consider whether every company has a management team that acts with integrity and takes a long-term view, a competitive and resilient franchise, and conservative financials.

- Rob Harley Stewart

Investors

What does sustainable investing look like in the longer term? Stewart’s Harley expects to see a gradual shift in the sense that ultimately, sustainability should be absorbed into the investment mainstream. “I think the importance and idea of sustainable investing will gradually take hold, but the process won’t be fast, uniform or neat. It’ll likely be patchy and staccato. Parts of the industry will resist and move slowly,” he said.

Eventually, Harley continued, “attention to things that once seemed unusual and far reaching will become commonplace and seen as normal. Sustainability will enter the mainstream, and when that happens, people will probably stop talking about it as something distinct. It’ll become a bit like electricity a century ago or wireless connectivity this century — something that’s just there that people take as a given.”

Bioy of Morningstar Sustainalytics sees ongoing evolution. “ESG is moving from voluntary to regulated, and from proprietary to market-level standards. It’s being shaped by disclosure regulation,” she said.

“The climate transition and the opportunities stemming from it represent a fundamental economic transformation,” Bioy added. “There is substantial opportunity, along with high uncertainty and risk. One way to reduce that uncertainty is to recognize that investors can’t do it alone. We need e ective public policy related to climate change. It’s critical that asset owners make their voices heard in the policy arena. Getting policy in place across the key markets will make a huge di erence as the climate

evolves.”

ESG is moving from voluntary to regulated, and from proprietary to market-level standards. It’s being shaped by disclosure regulation.

-

Hortense Bioy Morningstar Sustainalytics

Sponsored by

transition

BlackRock, Microsoft to raise $30B for data centers, energy infrastructure

y B DOUGLAS APPELL

BlackRock and a trio of partners aim to raise $30 billion to invest in data centers and the supporting power infrastructure that those voracious centers require, according to a joint news release.

Other members of the quartet’s “Global AI Infrastructure Investment Partnership” are Microsoft, Global Infrastructure Partners, the $100 billion infrastructure-focused alternatives rm BlackRock is poised to acquire, and MGX, an Abu Dhabi-based technology investment company launched earlier this year by the United Arab Emirates.

In addition, NVIDIA, the AI-focused semiconductor giant, will support the efforts as well.

Larry Fink, BlackRock chairman and CEO, in the news release said investing

in data centers, the bedrock of the digital economy, will help unlock a “multi-trillion-dollar, long-term investment opportunity,” powering economic growth, creating jobs and driving AI technology innovation.

BlackRock, GIP, Microsoft and MGX will contribute some of the $30 billion in capital the partnership is looking to raise, and look to external clients to furnish the rest.

Debt nancing should boost the partnership’s nancial repower to around $100 billion, the news release said.

BlackRock spokesman Ed Sweeney declined to provide further details beyond the news release.

The news release said GAIIP will “make investments in new and expanded data centers to meet growing demand for computing power, as well as energy

ture investment trust that holds a diversi ed portfolio of 17 operational road concessions across eight states in India.

Terms of the deal were not disclosed.

infrastructure to create new sources of power for these facilities.

”The infrastructure investments will be “chie y in the United States fueling AI innovation and economic growth,” with the remainder to be invested in U.S. partner countries, the news release said. But the partnership will support “an open architecture and broad ecosystem,” offering full access on a non-exclusive basis for a diverse range of partners and companies.

Brad Smith, vice chair and president of Microsoft, in the news release noted that the capital spending requirements for AI infrastructure go “beyond what any single company or government can nance,” adding that GAIIP’s efforts will help advance technology while enhancing “national competitiveness, security, and economic prosperity.” 

Upon completion of the transaction, OMERS' stake in Interise Trust will increase to 34.8% from its current 21.3%.

Defined Contribution

Retirement plan sites, apps falling short, says J.D. Power

y B MARGARIDA CORREIA

Retirement plan websites and mobile apps are falling short of where they need to be. That’s the top-line nding of J.D. Power’s 2024 U.S. retirement plan digital experience study.

About 1 in 5 websites (21%) are not meeting basic consumer expectations, unking what J.D. Powers considers an optimal “foundational experience,” which weighs factors such as basic design, security and key information access.

Just as many are also failing to provide a “valuable experience” or an experience that is personalized and delivered proactively, the study found.

“Falling behind on digital can have very real consequences for engaging and in uencing perceptions and behaviors,” said Craig Martin, managing director and global head of wealth and lending intelligence at J.D. Power, in a news release Sept. 12. “Customers who are digitally disengaged are very unlikely to recognize or see value in these efforts, which means a lot of wasted time and resources – as well as reduced business expansion opportunities.”Charles Schwab ranked the highest in retirement plan digital satisfaction, with a score of 753, followed by Nationwide and Fidelity Investments, which scored 739 and 734, respectively.

program is valued at about C$28.1 billion.

Separately, on Sept. 10, the C$133.6 billion Ontario Municipal Employees Retirement System, Toronto, said it signed an agreement with Allianz Capital Partners to acquire ACP’s 13.5% stake in Interise Trust, an Indian infrastruc-

The transaction is expected to close at end of the year, subject to certain customary closing conditions and regulatory approvals.

ACP is a unit of Allianz Global Investors, which has a total of €555 billion ($615.2 billion) in assets under management.

However, CPP Investments will remain the largest investor in Interise Trust, with the remaining stakes held by domestic investors in India. A CPP Investments spokesperson con rmed the pension fund holds a 60.8% stake in Interise.

OMERS initially bought a stake in Interise Trust, formerly known as IndInfravit Trust, in 2019, for C$160 million. 

Paychex ranked last with a score of 634. Voya Financial and Empower Financial rounded out the bottom three, each scoring 667.

The study found that retirement plan websites and apps underperform those of other industries – including insurance, automotive nance, utilities and banking – when it comes to ease of use and ability to nd information.

Nevertheless, the overall satisfaction with retirement-plan digital experiences increased 18 points to 703 on a 1,000-point scale from 2023.  

Retirement Board of the Firemen’s Annuity & Benefit Fund of Chicago, assets of approximately $1.3 billion,

actuarial studies, and oversee other reporting as requested and required.

NYC Comptroller’s Office PIN # 01524BUD69500 REQUEST FOR PROPOSALS FOR ACTUARIAL SERVICES

The Retirement Board of the Firemen’s Annuity & Benefit Fund of Chicago, with assets of approximately $1.3 billion, solicits proposals for a (1) Core Fixed

The full job description and qualifications are available on the RSCD website at www.rscd.org.

Indiana Public Retirement System (INPRS) seeks responses to RFP 24-04 from respondents interested in providing investment counsel legal services. Specifications may be obtained at the following address: http://www.in.gov/inprs/quoting.htm

The New York City Office of the Comptroller “Comptroller”, on behalf of The City of New York (City), is releasing this Request for Proposals (RFP) in order to invite qualified actuarial firms to submit a proposal to conduct actuarial experience studies, audits of employer contributions, and related review services. Section 96 of the New York City Charter requires that the Comptroller with the approval of the City’s Audit Committee select an independent actuary to review the actuarial assumptions used to calculate contributions to the five (5) actuarially-funded City retirement systems. The contract resulting from this RFP is expected to have a term of four (4) years covering two (2) consecutive engagements covering two (2) biennial periods.

A cover letter and resume must be submitted to rscdjobs@rscd.org to be considered for this opportunity.

A cover letter and resume must be submitted to rscdjobs@rscd.org to be considered for this opportunity.

The New York City Office of the Comptroller “Comptroller”, on behalf of The City of New York (City), is releasing this Request for Proposals (RFP) in order to invite qualified actuarial firms to submit a proposal to conduct actuarial experience studies, audits of employer contributions, and related review services. Section 96 of the New York City Charter requires that the Comptroller with the approval of the City’s Audit Committee select an independent actuary to review the actuarial assumptions used to calculate contributions to the five (5) actuarially-funded City retirement systems. The contract resulting from this RFP is expected to have a term of four (4) years covering two (2) consecutive engagements covering two (2) biennial periods.

To be considered, firms submitting proposals must be a qualified actuarial firm and/or a firm with a qualified actuarial component that has performed one or more actuarial experience studies and related services of comparable scope for a municipal/state pension system in the past seven (7) years; and has significant experience during the past seven (7) years providing actuarial services to large public municipal/state pension systems with assets over $10 billion.

The New York City Deferred Compensation Plan (the “Plan”) is seeking qualified vendors to provide active Intermediate Fixed Income investment management services for the Stable Income Fund (“the Fund”) investment option of the Plan. The Plan is seeking qualified vendors to manage a portfolio against the Barclays Intermediate Aggregate Index. The objective of the Fund is to provide an opportunity to invest in high quality fixed income securities with an emphasis on safety of principal and consistency of returns. To be considered, vendors must submit their product information to Segal Marco Advisors at the following e-mail address: nycdcp.procurement@ segalmarco.com. Please complete the submission of product information no later than 4:30 P.M. Eastern Time on April 1, 2024.

The New York City Deferred Compensation Plan (the “Plan”) is seeking qualified vendors to provide active Intermediate Fixed Income investment management services for the Stable Income Fund (“the Fund”) investment option of the Plan. The Plan is seeking qualified vendors to manage a portfolio against the Barclays Intermediate Aggregate Index. The objective of the Fund is to provide an opportunity to invest in high quality fixed income securities with an emphasis on safety of principal and consistency of returns. To be considered, vendors must submit their product information to Segal Marco Advisors at the following e-mail address: nycdcp.procurement@ segalmarco.com. Please complete the submission of product information no later than 4:30 P.M. Eastern Time on

To be considered, firms submitting proposals must be a qualified actuarial firm and/or a firm with a qualified actuarial component that has performed one or more actuarial experience studies and related services of comparable scope for a municipal/state pension system in the past seven (7) years; and has significant experience during the past seven (7) years providing actuarial services to large public municipal/state pension systems with assets over $10 billion.

All qualified and interested firms are advised to register to download the Request for Proposal from the Comptroller’s website starting July 29, 2024, https:// comptroller.nyc.gov/services/for-businesses/doing-business-with-the-comptroller/rfps-solicitations/ which fully describes the scope of work, minimum requirements and how to participate. To download the Request for Proposal (RFP), select “RFPs and Solicitations” then select “ Actuarial Audit of Employee Contributions for Fiscal Year 2024 and Fiscal Year 2026, Experience Studies of Data Through June 30, 2023 and June 30, 2025, and Related Review Services”.

Firefighters’ Retirement System (Louisiana) is soliciting proposals from investment

ladwp.com

All qualified and interested firms are advised to register to download the Request for Proposal from the Comptroller’s website starting July 29, 2024, https:// comptroller.nyc.gov/services/for-businesses/doing-business-with-the-comptroller/rfps-solicitations/ which fully describes the scope of work, minimum requirements and how to participate. To download the Request for Proposal (RFP), select “RFPs and Solicitations” then select “ Actuarial Audit of Employee Contributions for Fiscal Year 2024 and Fiscal Year 2026, Experience Studies of Data Through June 30, 2023 and June 30, 2025, and Related Review Services”.

California Earthquake Authority (CEA) and California Wildfire Fund (CWF) are seeking to contract with a Financial Advisor for advisory services on behalf of one, or both, of these funds. Please refer to the Contracting & Opportunities section of CEA’s website at www. earthquakeauthority.com for a copy of the RFQ and the general qualifications of the successful proposer. The response to the RFQ is due Friday, March 29, 2024.

This Procurement is subject to participation goals for MBE and/or WBE as required by Section 6-129 of the New York City Administrative Code. Proposals from minority-owned and women-owned businesses or proposals that include partnering arrangements with minority-owned or women-owned firms are encouraged.

This Procurement is subject to participation goals for MBE and/or WBE as required by Section 6-129 of the New York City Administrative Code. Proposals from minority-owned and women-owned businesses or proposals that include partnering arrangements with minority-owned or women-owned firms are encouraged.

Earthquake Authority (CEA) and California Wildfire Fund (CWF) are seeking to contract with a Financial Advisor for advisory services on behalf of one, or both, of these funds. Please refer to the Contracting & Opportunities section of CEA’s website at www. earthquakeauthority.com for a copy of the RFQ and the general qualifications of the successful proposer. The response to the RFQ is due Friday, March 29, 2024.

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Consistent with the policies expressed by the City, proposals from certified minority-owned and/or women-owned businesses or proposals that include partnering arrangements with certified minority-owned and/or women-owned firms are encouraged. Additionally, proposals from small and New York City-based

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Africa and the Antipodes. Cricket will also return to the Olympics in 2028 in Los Angeles, after a 128-year hiatus.

The England and Wales Cricket Board, the national governing body of the sport in those countries, has initiated a process to attract private equity firms to invest in the eight teams that participate in The Hundred, a tournament comprising men's and women's English and Welsh cricket clubs that commenced in 2021, a 100-ball competition.

Global interest

The board said on Sept. 5 that the process has “sparked global interest from a variety of investors” and that “incoming investors will act as strategic partners for its future success.”

In the next few months, the board will work with local cricket clubs to “assess the suitability of prospective partners, their values and their ambitions for the team of interest.” The board expects to announce specific investments in 2025.

“This marks the most significant private investment opportunity in the history of cricket in our country and there’s never been a better moment for partners to engage with our sport,” said Vikram Banerjee, the board’s director of business operations, in the release. “Cricket’s global appeal continues to soar and in England and Wales -- we’ve seen engagement with the sport hit record-levels.”

A spokesperson for the board told P&I that a minimum 49% in each team is available for purchase by the invited firms, with a minimum hold period of four years.

Sources said that the majority of each 49% stake in a team would likely go to one bidder, but that they could also allow a consortium of investors. That 49% is the stake currently held in each team by the board, while the remaining 51% stake is held by each club’s host county. “It is up to (each host county) whether they wish to offer some of this for sale in addition so that investors could obtain a majority stake,” the spokesperson noted.

The board spokesperson also indicated that cricket is growing rapidly around the globe, and that, with its return to the 2028 Olympics, so “we’re sure there will be continued interest in the sport from (private equity) and other investors.”

Ben Davison, director, transactions at PwC, said cricket made headlines following the official launch of The Hundred sales process. "The opportunity to invest in one of eight different franchises has attracted significant interest from investors, including private equity and existing investors in cricket around the globe," he said.

According to U.K. media, CVC Capital Partners is in negotiations to make an acquisition in one of The Hundred franchises. CVC could not be reached for comment.

Like the NFL?

Shana Orczyk Sissel, founder and chief executive officer of Banríon Capital Management, an alternative asset technology platform which advises clients on alternatives, said U.S.-based private equity firms seeking to buy cricket teams in Britain or as far away as India might not even care about cricket, but would be attracted to these opportunities if

they believed that they could deliver their clients with attractive excess returns.“I think the more esoteric sporting leagues – like cricket which has moderate following in the U.S. –might be more appealing to American investors because they may be more likely to generate more handsome returns,” she said. “And they provide some healthy diversification to a private equity portfolio.”

Buying a stake in the NFL is different, she pointed out. In the U.S., owning a piece of, say, the Dallas Cowboys or Kansas City Chiefs is more of a “trophy investment” for American PE limited partners, and there are limited ways to add value to such an investment.

PE in India

In India — another cricket-mad nation — some private equity firms have already invested in local cricket clubs. In June 2021, New Yorkbased RedBird Capital Partners purchased a 15% stake in the Rajasthan Royals of the Indian Premier League, India’s top cricket league with 10 teams. Terms of that transaction were not disclosed.

Gerry Cardinale, founder and managing partner of RedBird, told P&I the firm still holds that initial stake, but declined to comment on its current valuation.

“Rumored valuations for other expansion (cricket) franchises with less history than the Royals are in the range of US$1 billion,” Cardinale said. RedBird has more than $10 billion in AUM.Cardinale said his firm RedBird could “help drive value for the Royals” as it has with some of its other sports properties, including Italian soccer club AC Milan.

The business fundamentals of the IPL are very strong, said Cardinale, boasting a “large, growing base of passionate fans, a disciplined league structure that drives profitability at each club, rapid adoption of data analytics strategies, and multiple growth opportunities both domestically and abroad.”

In fact, Cardinale observed, the IPL “feels like the NFL did 20 years ago.”

In 2021, the Luxembourg-based private equity firm CVC Capital Partners purchased the Gujarat Titans cricket club outright for about $827 million, making it the first private equity firm to buy an IPL team. CVC has €193 billion ($214.5 billion) of assets under management

Santosh N, managing director of D and P Advisory, a valuation services provider and boutique transaction advisory firm based in Bangalore, India, noted that there was also talk last year that Tiger Global Management was seeking to purchase a stake in the Royals, but that transaction did not go through.

However, the IPL's attraction to private equity investors is that it offers a “unique pairing of emerging-market growth with a strong, well-managed league construct,” Cardinale said.  "This mix of high growth and sustained profitability is hard to find,” he added.

Scott Markman, founder and

meeting.

“No investment strategy can outperform its benchmark every day or every week or every month or even every year,” Nzima said. “A long investment horizon is required to ac-

president of Monogram Group, a Chicago-based global branding agency specializing in private equity portfolio companies, said IPL teams are a potentially attractive buy due to their long-term trajectory of value growth, the pool of potential buyers down the road, operational efficiency opportunities, and licensing rights, among other reasons.

“These variables make it hard to project the upside on a purely financial basis, but ultimately they’ll all contribute to future valuations and the potential upside of Indian cricket clubs,” he said.

“Now that the door for PE firms or PE firm owners to invest in global sports brands/franchises has been opened, many firms are chasing these opportunities and here the law of scarcity applies — there’s just a limited amount of them that would make sense to explore. And, professional Indian cricket teams fall within those boundaries, due to the history, passion, market size, global popularity of the sport,” Markman said.

Valuations

According to a June valuation study by Houlihan Lokey, a New York-based investment bank, the 10 teams in the IPL had a combined valuation of about $16.4 billion, having surged from $8.5 billion in only two years.

“IPL is the only property in the world that has the ability to reach over a billion-plus populace, with its popularity not just limited to the In-

tually reap those benefits from active management.”

Ali Kazemi, a managing director at Wilshire, CalPERS’ general investment consultant, said at the meeting that the pension fund’s lower-than-expected return could also be explained by its 10 percentage point gap between its actual and target private markets allocation. But he said that pension officials “con-

ants and Gujarat Titans, much of the future growth and profitability has already been priced in.” According to Houlihan, the Super Giants have a brand value of $91 million, while the Titans have a brand value of $124 million.

Santosh N also observed that IPL teams are currently highly profitable, thanks to revenue streams from media rights, sponsorships, and fan engagement. “But the challenge is that these high profitability levels are already discounted into the current valuations,” he added. “The prices paid for recent teams suggest that investors are expecting strong future growth, but given the already high valuations, much of this growth is baked in, leaving less upside for new investors.”

Aside for the two new teams (Gujarat Titans and Lucknow Super Giants), most other IPL teams have started to generate substantial profits after the renewed media rights deal last year, with EBITDAs exceeding 20% for many franchisees, said Harsh Talikoti a senior vice president in Houlihan Lokey’s Corporate Valuation Advisory Services practice. The Titans and Super Giants will likely see profitability in the longer term, he added.

dian subcontinent,” the Houlihan report noted.

In the Houlihan study, Manoj Badale, the majority owner of the Royals, said IPL “has always been highly investible.”

“Having been inspired by U.S. sports leagues, and particularly the model of the NFL, the IPL was always going to attract institutional investors,” Badale said. “A closed league (no relegation) offers longterm security, a ‘hard’ salary cap ensures a level playing field and competitive parity, and an equitable commercial model in which central income is split equally amongst franchises secures contractual revenue for franchises.”

In cricket leagues, “relegation” refers to the practice of moving poorer performing teams to a lower division for the following season. However, as IPL is a “closed league,” such relegation cannot occur.

But Santosh N is somewhat cautious. “There’s a fundamental difference between a good asset and an investable asset,” he said. “A good asset might generate strong cash flows and appear profitable, but it may not always be an attractive investment if its current valuation already factors in much of the future growth potential.”

Santosh N noted that the IPL and its teams represent a “fantastic cash-generating business.”  However, he cautioned, “when you consider the valuations being paid, particularly the prices for the new franchises like Lucknow Super Gi-

tinue to build into those positions, again, that 8% target to private credit being the biggest driver of that gap.”

In the fiscal year, CalPERS committed $28 billion to private markets.

Kazemi also noted during his presentation that CalPERS’ CIO turnover has had an impact on the fund.

Gilmore succeeded Nicole Musicco, who left CalPERS in September

While historically the IPL has seen a consistent rise in valuations, mainly driven by the robust growth in media rights fees, which have been a significant revenue-driver, Santosh N noted however that this year, “the league saw a decline in valuations because the previous figures had already factored in expectations of continued high growth in media rights per match,” he said.  “(But) with consolidation in the Indian media industry, there is a real possibility that these expectations for future media rights growth may not materialize as strongly as anticipated.”

According to media reports in India, the enterprise value of IPL dropped by 11.7% to $9.9 billion this year.

Broadcast rights

In 2023, Houlihan noted, the broadcast rights to IPL matches were sold for just over $3 billion, while the internet streaming rights alone brought in almost $3.1 billion. From a private equity perspective, IPL teams are attractive due to their strong revenue model, driven by lucrative media rights, sponsorship deals, and growing fan engagement, Santosh N said.

Santosh N further cautioned that the Indian market can pose some obstacles for western PE investors due to such issues as regulatory hurdles, complex tax laws, and compliance issues. “Additionally, cultural and operational differences, along with competition from domestic investors, make it challenging to navigate deals,” he said. “However, India's growth potential and economic opportunities continue to attract foreign investment despite these barriers.”

Sophie Baker contributed to this story.

2023, becoming the second consecutive CIO to leave after only 18 months on the job.

“We think it’s fair to say that some degree of a lack of continuity from a strategic standpoint, including turnover at the CIO level has impacted the ability for the team to implement a portfolio strategy in a consistent manner, so that’s something to point out,” Kazemi said.

STRONG FUNDAMENTALS: RedBird’s Gerry Cardinale

Sustainable Investing: Pursuing Differentiated Paths

Wednesday, September 25 | 2:00 pm ET

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What are the top themes across sustainable dimensions being considered today, and how are material ESG factors being used across the asset classes? Which regulations are driving investment decisions, alongside notable advances in sustainability data and metrics? This webinar covers the latest developments in sustainable investing by institutional allocators via active and passive strategies.

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In this webcast, DC plan professionals explain why they are revisiting this often-overlooked, but important part of their retirement line-ups.

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trillion rm as co-head of private investments, still serves as a mentor to her. Pelletier still checks in him now as a partner and head of endowments and foundations at the $1.7 trillion consultant NEPC — and as a member of Pensions & Investments’ 2024 class In uential Women in Institutional Investing.

Many of the 60 honorees were fortunate to have mentors, and credit them for opening the door to success and for listening and providing advice.

Mentors come in the form of bosses, senior colleagues, as well as college professors and alumni. Described as “people that helped me along the way and answered stupid questions,” these are people who “didn’t give up on me” and “gave me a chance,” said Ann Miletti, chief diversity of cer and head of active equity at the $504.9 billion Allspring Global Investments.

Paying the help forward she received  by mentoring others, Miletti said she gets “more out of it,” adding it’s nice to see the impact from “the other side.” Miletti and other honorees say it’s imperative for them to build a strong pipeline for younger individuals through formal and informal relationships in and out of the of ce.

But aside from mentoring, “are you really willing to help put this person forward for an opportunity?” Venus Phillips asked. To the managing director of the $4 billion Kresge Foundation, that’s sponsorship — and “often, diverse individuals are overmentored and undersponsored,” she added.

“What we need to do — as more senior people, especially women in the industry — is that when we have mentored someone to a point where we think they’re phenomenal, use your network to put them out there — whether it’s within your own organization or somewhere else within the eld — (and) really usher across the nish line,” Phillips said.

Other than visiting a job board

and “applying and hoping you get it,” sponsorships are a way many people obtain jobs, Phillips added, so “use your relationships in order to help your mentees — or, I prefer, sponsorees — get to that next level.”

The frontlines of opportunity

When Pelletier joined NEPC in 2008, she worked for Cathy Konicki. Described by Pelletier as “a really great mentor,”  Konicki “led the endowment and foundation team for a really long time” before retiring in 2022.

Konicki took Pelletier “under her wing, showed her the ropes” and challenged the new consultant “to do better and prepare in different ways.” But Pelletier noted her mentor was particularly receptive if one advocated for their interest or passion, as she did in Konicki’s of ce after a year or two.

Pelletier said she would say, “Cathy, here are the things that I’m less interested in, but let me tell you about things I’m really interested in. So if these opportunities come up, can you think of me? Can you put me in a position to participate? If this type of prospect walks in the door, can I be on the team? Can I help?”

In turn, Konicki would ask “why is that an interest?” and “why would you be successful working with that type of group?”  Exchanges like that are what Pelletier said “helped me carve a path within endowments and foundations.” Having Konicki’s support for a career that “was always marrying my personal passion and professional interest” helped Pelletier understand that her path was “a good t for me.”

Similarly, on Marcia Page’s journey to founding and leading Värde Partners and MPowered Capital, she said she had the bene t of a sponsor who made sure she “had visibility with senior leaders” at Cargill. Retiring as vice chair of the agricultural rm in 2006, Bob Lumpkins hired Page and early on gave her high-prole projects, including a task to evaluate a high-yield bond in the mid‘80s, she said.

While Page was preparing research on the bond, Lumpkins told her that he thought she didn’t “un-

Harris/Trump

and former President Donald Trump have outlined proposals for future tax policy with varying degrees of speci city. Here’s a look at where the candidates stand:

Tax extensions

Trump has called for extending the 2017 bill’s provisions that are set to expire, which mostly affect individuals, such as increases in both the standard deduction and the size of the child tax credit.

In May, the Congressional Budget Of ce estimated that it would cost $4.6 trillion over 10 years to extend the expiring 2017 tax cuts.

Harris, like President Joe Biden, has vowed not to raise taxes on Americans who make under $400,000 annually (about 98% of taxpayers according to the nonpartisan Tax Foundation).

The Committee for a Responsible Federal Budget has estimated the cost of permanently extending the 2017 bill's tax breaks for people earning less than $400,000 could range from about $1.5 trillion to $2.5 trillion over 10 years.

derstand this company very well” and needed her to “do additional work before coming in” to present to the investment committee, she said.

“My eyes, of course, welled up in tears. I thought ‘I can wing this a little bit,’ but I learned very quickly that you don’t wing things,” Page added. “You come prepared, and you bring excellence to everything you do.”

As a result of the evaluation Page prepared, Cargill purchased $5 million in bonds from what was then Drexel Burnham Lambert, and Cargill’s global nancial trading desk added her to its team.

“I felt like I brought enough technical knowledge to bear to hold my own, but it was also an environment that was inclusive and where I was very much supported,” Page said. “It’s that combination that gave me a lot of con dence very early on in my career.”

Both alternative investment rms, Värde Partners manages more than $13 billion in assets, and MPowered Capital closed its rst fund with $110 million in 2023.

‘Shoulders of giants’

As an equity analyst starting her career at J.P. Morgan Asset Management in 1995, Anne-Marie Fink was guided by Susan Ulick. Ending her time at the rm as head of U.S. research in 2000, Ulick taught Fink how to interview people and frame questions to get the most information.

“You can’t necessarily go with your hardest question rst,” Fink said, adding that there are “different ways to get people talking, and then lead into some of the tougher places where you really want to get somewhat more sensitive information.”

“Standing on the shoulders of giants” at the rm, Fink said Ulick was just one of the women who surrounded her. When Fink was pregnant, several shared with her “what their experiences were and how to deal with this issue, that issue — or some of the unknown things” of pregnancy, she said.

Now chief investment of cer of private markets and funds alpha at the $156 billion State of Wisconsin Investment Board, Madison, Fink is

‘DANGEROUS

Capital gains

Harris’ economic agenda calls for increasing the stock buyback tax to 4% from 1% and establishing a new billionaire minimum tax (no specifics from Harris are available, but President Joe Biden has proposed a 25% rate for households with more than $100 million of wealth, the Committee for a Responsible Federal Budget noted). The Democratic nominee also pledges to increase the ordinary capital gains tax rate to 28% from 20% for households making over $1 million per year. “Billionaires and big corporations

paying her mentors’ work forward. At least once a year, she tries to hold one-on-one meetings over a meal with all 40 people who work with her. But what she does that is “slightly different” for some of the women — including one who is currently pregnant — is talk about the “challenges that are particular to women and some of the things that I’ve seen over the years,” Fink said.

Reflecting on the “trailblazing” of the women earlier in her career, Fink said “their willingness to share that was enormously helpful, so then I try to do that” to support the expectant mother.

Lauren Mathias, who is coming up at 20 years at Callan, said she looks up to Executive Vice President and Chief Operating Officer Inga Sweet, who is a former boss. Both of them are mothers of three, and have “lived through the same challenges” — but Sweet did so “at a time when fewer women were in leadership positions,” Mathias noted.

“Seeing how it can be possible to build a career and become a leader at Callan while also being a mom was important for” Mathias, who added that Sweet “was very supportive of me while we grew our family, so it also taught me that trust, sincerity and kindness really can go a long way.” The COO was also an example of “who we want” at the more than $4 trillion consultant firm “now and in the future.”

Sharing kind words about Mathias, Sweet said she has flourished as a “wonderful colleague,” one who serves in two roles: one being senior vice president of global manager research, and the champion of “diversity, equity and belonging both within our firm and beyond” to make “our industry more inclusive.”

Now, Mathias said the “best way” for her to “express gratitude” is to help develop the next generation of leaders at the firm. She works with an analyst, but she also works with the junior members of the internal Diversity, Equity and Belonging Council.

“I always try to be open and available to them, show that same level of kindness and appreciation for their work at Callan, while also respecting

must pay their fair share in taxes,” Harris said in a campaign speech earlier this month. “And while we ensure that the wealthy and big corporations pay their fair share, we will tax capital gains at a rate that rewards investment in America’s innovators, founders and small businesses.”

Biden has proposed raising the top marginal tax rate on long-term capital gains to 44.6%, which includes a 5% net investment tax.

“I think Harris politically wanted to position herself more as a moderate, so she aimed lower,” said Steven Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute.

Trump has not called for raising taxes on capital gains.

“On taxing capital, Trump and Harris are going in opposite directions,” Rosenthal added.

And though neither candidate has mentioned carried interest on the campaign trail, private equity, hedge fund and venture capital trade groups are gearing up for a fight next year.  Corporate taxes

In the 2017 bill Trump signed into law, the corporate tax rate was cut to 21% from 35%. Trump, who touts lower corporate taxes as a boon for businesses and the economy writ large,

their endeavors outside,” Mathias added.

A generation on a mission

As they were starting out, some honorees such as Shannon O’Leary did not have mentors and sponsors. Because of that, the CIO of the $1.8 billion Saint Paul & Minnesota Foundation said that she feels “strongly that I need to help young people bridge to a mentoring solution.” If she can’t play that role herself, she will “help find somebody else to be that solution.”

As they enter the workforce, Generation Z workers are looking for employers that enable them to learn as well as produce meaningful work — not only for their employer but for society.

“A lot of the young people who are coming into the industry today work differently than a lot of us have,”

Kresge’s Phillips said. These people “think differently and speak differently. They’re able to speak up for themselves and change.”

That’s a positive trend for Amy Chen — CIO of the Smithsonian In-

has called for lowering the rate to 15%.

“To further support the revival of American manufacturing, my plan calls for expanded (research and development) tax credits, 100% bonus depreciation, expensing for new manufacturing investments, and a reduction in the corporate tax rate from 21% to 15%, solely for companies that make their product in America,” Trump said Sept. 6 during a speech before the Economic Club of New York.

Benjamin R. Page, a senior fellow at the Urban-Brookings Tax Policy Center, doesn’t think a further reduction of the corporate tax rate is likely.

“I’m not sure there’s that much appetite for reducing taxes on corporations,” Page said. “If Trump was president and Republicans controlled both the House and Senate, it’s conceivable that that rate could be reduced further but (Trump) might have trouble getting that through Congress.”

On the whole, sources said Republicans in Congress are pleased with where the rate already is.

Harris on the other hand has called for raising the corporate tax rate to 28%.

Tariffs

The Republican candidate has

Taking time out of their schedules during the summer, the young women whom Miletti met “were just sponges” as they listened to her and other senior women, she noted. Not asking for a lot but wanting to start their careers on the right foot, “they’re just looking for help,” she added.

Honorees’ employers have also sourced interns through programs such as the United Negro College Fund’s Lighted Pathways program. At the $112 billion Acadian Asset Management, several interns worked in the client group, which was CEO Kelly Young’s previous area of responsibility.

An alumna of the program has worked at Acadian for a few months as a full-time staffer. Excelling in the role, the early career woman is an “example of how do you translate best intentions and participation in these programs into actual action,” Young added.

stitution’s $2.6 billion endowment — who’s seeing members of Generation Z looking at the endowment and foundation space as a career opportunity. “This generation is thinking about social impact, and thinking about mission investing in general,” she added.

O’Leary speaks with young women at local high schools and colleges around Saint Paul, giving them “a little rousing pitch on ‘here’s why you should consider getting into this industry’ and ‘here’s why you should stay.’” Aside from securing good jobs and compensation within finance, women can “find meaning in the work,” so O’Leary will tell first-year business business students to explore the opportunity and not “discount your own ability.”

Outside organizations

Some honorees mentor younger people through outside organizations. Working with SecureFutures, Allspring’s Miletti participated in a July speed mentorship event with the financial literacy program’s high school students.

called for imposing a universal baseline tariff on all U.S. imports of 10% to 20% and a 60% tariff on all U.S. imports from China, according to the nonprofit Tax Foundation.

The key to boost American manufacturing “will be a pro-American trade policy that uses tariffs to encourage production here and bring trillions and trillions of dollars back home,” Trump said earlier this month.

Harris in the Sept. 10 presidential debate criticized the plan and referred to it as a tax on Americans.

Trump in the debate disagreed. Consumers are “not going to have higher prices,” he said. “Who’s going to have higher prices is China and all the countries that have been ripping us off for years.”

Economists are less bullish on Trump’s tariff proposal.

According to the Peterson Institute for International Economics, the Trump proposal “would reduce after-tax incomes by about 3.5% for those in the bottom half of the income distribution,” and “would cost a typical household in the middle of the income distribution at least $1,700 in increased taxes each year.” Higher tariffs would pass higher costs onto American consumers, economists say.

CONTINUED FROM PAGE 4

The good news for these deals is that the buyers and sellers are able to have a meeting of the minds and get the transactions done, Ockerbloom said.

“It’s healthy for the market even if it is meaningfully distressed,” Ockerbloom said.

And there could be better days to come. The expectation that interest rates will come down could bring “some equilibrium between buyers and sellers,” he said.

“I’m old enough to have seen multiple cycles and to me this isn’t new,” Ockerbloom said.

In the U.S., Barings’ investments tilt more toward debt than equity. The situation in Europe is quite different because there is a more functional debt market, he said.

Honorees including Chen and Phillips have also said they source interns or mentor young women through Girls Who Invest. Among the members of the 2024 class of Influential Women who support Girls Who Invest include the nonprofit’s CEO, Katherine Jollon Colsher.

As she inspires GWI’s beneficiaries or “scholars,” Colsher also inspires more junior colleagues like Heather Perceval, head of programs and career advancement, who pointed to the CEO’s energy and ability to find “the opportunity in every moment” to help the nonprofit. Colsher begins conversations through “what if” statements to get those who are junior to her to think big, and in turn, Perceval does the same.

Perceval said she was encouraged by Colsher to devise a plan to give scholars in GWI’s on-campus program “the opportunity to showcase their own stories” and get to know the nonprofit’s board members.

“In the end, we designed a day that did just that,” when board members and scholars “shared their journeys and stories with each other,” Perceval said. For the board members, “their dedication to our mission” was reinforced through newly built connections.

Trump has also called for establishing a tariff-backed federal sovereign wealth fund to pay for infrastructure projects and reduce the national debt.

The bottom line

Harris has said she’d like to expand the child tax credit, increase the deduction for startup business costs and provide down payment support for certain first-time homebuyers.

Trump (followed by Harris later) said he’d like to exempt tips from income taxes, cease taxes on overtime work and eliminate the green energy subsidies in the Inflation Reduction Act, which Democrats passed in 2022.

He has also said Social Security benefits should be exempt from taxes.

“People on Social Security have been wiped out by inflation and now on top of it, we tax their benefits,” he said earlier this month.

The Tax Foundation estimates that the major tax changes proposed by Trump would increase long-run gross domestic product by about 1.5% while decreasing the federal tax revenue over the 10-year budget window by $6.1 trillion on a conventional basis.

For Harris, the Tax Foundation

Capitalization rates, which is the rate of return on investment property, have not changed as much in Europe as in the U.S., Ockerbloom said.

Most real estate asset classes are “functional,” he said.

“Largely, there’s a more functional office market in Europe than in the U.S.,” he said.

For instance, the number of Europeans who have come back to work in offices is meaningfully greater than in the U.S., Ockerbloom said. One likely reason is that living spaces are smaller than in the U.S., he said.

“We see really interesting opportunities in (real estate) equity in Europe,” Ockerbloom said.

The bid-ask spread, meaning the difference between a seller’s and potential buyer’s view of a property’s price, is not as wide, Ockerbloom said. Ockerbloom and his team have traveled all over the world and investors recognize that there is more opportunity to put capital to work in Europe in the near term.

“People have the mindset that they don’t want to miss out on a great vintage, but there’s not a ton of follow through,” Ockerbloom said. “But we expect that to come.”

But for now, there’s still a fair amount of hesitance in the market, he said.

estimates the her policies would raise about $1.7 trillion over 10 years on a conventional basis and reduce long-run GDP by 2%.

“We find the tax policies would raise top tax rates on corporate and individual income to among the highest in the developed world, slowing economic growth and reducing competitiveness,” the Tax Foundation said of the vice president’s policies.

Kent Smetters, a business economics and public policy professor at the University of Pennsylvania’s Wharton School, said that both candidates would increase the national debt (currently at $35 trillion) while reducing the size of the economy.

“The analogy I’ve been using is the house is burning down and both the candidates are arguing over the furniture,” Smetters said. “We are on a path right where the economy is in a dangerous position of adding more and more debt.”

Smetters added that lawmakers need to establish a plan to tackle the mounting debt crisis.

“Both candidates are working in the direction of more debt that would contract the economy and promising goodies for everybody but not really taking hard positions that are needed,” he said.

‘DON’T DISCOUNT YOUR ABILITY’: Saint Paul & Minnesota Foundation’s Shannon O’Leary

with Arctos Partners’ Ian Charles

Ian Charles’ journey from Alaska to a pioneer in sports investing

Group, Ares Management, CVC Capital Partners, Ludis and Sixth Street. Arctos owns minority stakes in six MLB teams including the Los Angeles Dodgers and Chicago Cubs; NBA teams including the Philadelphia 76ers and Golden State Warriors; NHL teams including the Minnesota Wild and Tampa Bay Lightning; global soccer teams including Paris Saint-Germain and the Premier Lacrosse League. Questions and answers have been edited for clarity.

Q | Tell us about your career path leading you to sports investing.

A | I’m a nerd who loves this asset class of private equity. Very early in my career, I had the opportunity to help start the very rst intermediary in the secondaries market in 2001. That rm was called Cogent Partners. No one had ever thought that pension funds and endowments might need someone to help them sell (stakes in funds). It seems like a very obvious opportunity, to not only help sellers, but also to help more buyers buy.

Then in 2006, at Landmark Partners I had the opportunity to help them build some really unique capabilities around data science. I was drawn to big, structurally illiquid markets, where a discount to intrinsic value might be available, and where data might give you an advantage, selecting better partners and structure might give you an opportunity to harvest your alpha.

Q | There are an increasing number of sports funds right now. How did Arctos come to be among those?

A | Four and a half years ago, I didn’t know anything about sports. I grew up in Alaska, a part of the country where there are no pro sports. At Landmark, I had the opportunity to work with some family of ces that owned pieces of sports teams, and they held them in their illiquid book, just alongside their buyout funds and their venture funds and their farmland and their art collection. And they wanted liquidity.

I learned sports had some very unique beta characteristics that we were unable to replicate with all of the data that we had. The beta characteristics of sports aren’t correlated with anything that an institutional investor has in its typical portfolio allocation.

It’s not correlated to public equities, to credit, tech, healthcare. That’s actually really rare and really interesting; we were able to validate that it wasn’t a statistical anomaly, it was the market structure of this particular kind of business. And we had the opportunity to buy positions in this asset class at material discounts to intrinsic value. The problem was it was a regulated market, and the reg-

ulator is the league. To me, it looked just like another secondary opportunity.

In 2019, Major League Baseball was the rst North American League to change its rules. They created a new owner called a “covered fund,” and our team identi ed the opportunity to bring deep, technical, entrepreneurial, secondary and private market skill in partnership with operating experience from the sports ecosystem. We had the courage to leave really great jobs to try and build an investment strategy around the thesis that this is an asset class that is durable.

Our co-founder David “Doc” O’Connor, was the managing partner of CAA talent agency. (He was also president and CEO of Madison Square Garden Co., whose assets include Madison Square Garden, the New York Knicks, New York Rangers, Radio City Music Hall, and other entertainment properties). He came at it from an operating perspective to build in sports. We saw the secondary liquidity side. He brought industry connectivity in sport.

So that was the vision that we had when we started the rm: that we could provide an alpha generating overlay on top of a very unique beta factor that had historically been a return enhancer and a risk reducer for its owners. That was our thesis.

Q | What’s the appetite among pension funds and other institutions?

A | In our sports strategy, approximately 26% of the capital that we have raised has come from U.S. pension funds. About 80% is institutional assets: pensions, endowments, foundations, sovereign wealth funds, insurance companies.

Five years ago, there was zero awareness of this opportunity while today there is a strong awareness. If you are an institutional investor that is interested in investing in this asset class and harvesting alpha, we are also your partner of choice.

We’re also representing the private equity industry to the sports industry because we are the rst mover and the rst member of private equity to come into this asset class.

It was just one of the unexpected things of this journey ... it’s something that we take very seriously, but we’re kind of grateful for. It’s a unique responsibility.

Q | Ontario Teachers was one of the first pension funds to invest in sports.

A | There have been historical examples of sponsors or institutions buying into sport, but most of them had not been successful. And sports had changed a lot since then. Fifteen years ago, European soccer and North American sports spent about 60% to 65% of revenue on players.

Over the last 15 years, because the sport and the business has grown so

much and through collaboration with the leagues, North American sports leagues, on average, now put between 45% and 48% of revenue on players. In soccer, it remains 60% to 65%.

Think of players’ spend as your cost of goods sold — and these are businesses with tremendous operating leverage  —  as players’ expenses rationalized, revenues grew in North America. And, so, the structural pro tability of North American sports changed dramatically, and the league started to impose very strict leverage limitations on ownership groups.

The average maximum allowable LTV (loan-to-value ratio) in North America is about 16% of value. That’s vs. 40% to 50% in LBO land, and as much as you can get in Europe for soccer.

And so what’s happened over the last 15 years is North American sport has transformed into, really, two different things: Every North American sport team in the big ve leagues has an equal, ratable ownership of the league and then a legal, local exclusive territory to operate a live entertainment business. It has this sort of monopolistic pricing power. And then the leagues, especially the big leagues, have monopolistic pricing power with their media and data and sponsorship partners because increasingly it is the most important content.

Q | So not unlike an annuity or a royalty?

A | Not unlike a music royalty or a mineral royalty or an investment, except it’s better than an annuity because the leagues actually have an investment-grade rating. The Big Four sports leagues typically have an investment-grade rating on their league-provided credit facilities.

Every team every year gets a dividend from the league. And then they have this protected region where no one else in that sport can compete with them for ticketing, sponsorship. And they might own the arena and all the real estate around the arena. And those two businesses are hard to replicate. For most of these teams, even the ticketing can have an annual renewal rate of up to 80% to 90% and built-in escalators; if the economy dips down 1%, a hard GDP recession, doesn’t materially impact the business.

Q | So how is sports a recession-proof business?

A | After food, beer, rent, for a lot of these customers, their tickets are the next most important thing. If the ratings go down — and they don’t — but if they do, doesn’t matter. And, so, the durability, the consistency and the predictability of the revenue streams is highly unusual and real asset-like. The margin has improved materially over the last 15 years and there’s no or low leverage.

Q | What are the returns like for investments in sports compared to other assets?

A | In the 10 most accommodating years of my career — 2011 to 2021, before the big 2022 sell-off — Cambridge has pooled average buyout and venture returns totaling 17%-20% annually. Real assets was 9%, and the S&P 500 was about 9%10%. North American sports? That’s 18% annually.

Q | How do you measure that?

A | We partnered with the University of Michigan and we now publish a quarterly benchmarking index called the Ross-Arctos Sports Franchise index. That’s all there, you can download the raw data yourself from the Ross-Arctos Sports Franchise Index. We have painstakingly collected all of this data and cleaned it, shared it. We think it’s important for investors to have a benchmark, and data to test, and for academics to have clean data to use in their analysis.

Q | What is the total addressable market in sports? And have you essentially built a secondary market for sports properties and their owners?

A | There are about 200 of these kinds of properties in North America and premier global sports that have the characteristics described.

If you take the 150 big ve North American clubs, you take the international properties that have some of these characteristics — the value of those when we started this rm was about $400 billion to $450 billion in 2019. Today it’s close to $500 billion-$550 billion.

We built a proprietary database of the minority owners in those 200. And on average, there are 11 non-family member limited partners or minority owners in each of those platforms. So, there’s a $550 billion TAM (total addressable market) with 2,000 non-family member minority owners who have no functional liquidity solution.  They have no way of meeting each other, and from time to time,

they will want to or need to sell, just like pension funds, from time to time, need or want to sell. The reasons are just slightly different. Death, divorce, you want to buy into a different team, generational, liquidity. There is active portfolio management that needs to take place and for many of these owners, this has become a huge asset in their portfolio. So, our thesis was we could bring all of our lessons from other private markets’ secondary strategies and attack that opportunity.

If you can’t use a lot of debt and you can’t tap into institutional capital, your growth is constrained by your internal cash ow generation. And for many of these businesses, they have just now hit an in ection point where a new arena, a fan activation real estate platform around the arena, investing overseas and building your brand in Europe or in Asia — those are real opportunities for these businesses that take capital.

Q | Your firm owns minority stakes in many teams. Explain how you are employing capital.

A | About 50% of the money put into the sport strategy is providing liquidity to existing owners, full or partial, as a secondaries business, half is growth. The other half of our business is the Keystone Strategy, providing new capital to alternative asset managers to grow.

So we have come to ownership groups and said, “You guys have owned this asset for 12 years. We think your market is fantastic, think your management team is fantastic. We would love to be helpful if we can. We’re willing to provide everybody with the option for liquidity on 10% to 15% of your position.” Just like we used to offer all of the LPs in a fund a tender opportunity. And, if 19 of them want to sell, awesome. If only three want to sell, that’s OK, too.

We also say, “Are you guys thinking about any acquisitions? Would you like to buy any other franchises? Would you like to buy the parking lots across the street? Are there any

capex opportunities in the arena that have a big ROI, because we would love to put capital on the balance sheet and help you do those things.”

Recent examples would be providing capital to the owner of the Utah Jazz in Salt Lake City, NBA team.

They recently acquired an NHL franchise called the Arizona Coyotes and moved it to Salt Lake City. It’s now called the Utah Hockey Club. The ownership group is working with fans to name the team. So this season, in October, probably for one season and one season only, there will be an NHL team called the Utah Hockey Club!

The controlling owner of the team is a successful tech entrepreneur named Ryan Smith. He and his partners bought 80% of the Utah Jazz and the arena, with the option of buying the rest. We helped them buy that other 20% together, so Arctos is part owner of the team and the arena and some of the real estate around it.

We put up some of the money. We also helped them purchase the MLS franchise in Salt Lake City, called Real Salt Lake, which is owned by Arctos, Ryan Smith and David Blitzer. We bought that team together.

Q | What’s your edge compared to other sports firms?

A | Arctos is the only firm in the world that has league approval in all five leagues that allow institutional capital. No one else has that in even two leagues. Because of our first mover advantage, because our firm was purpose-built for this strategy, it has allowed us to position ourselves as the partner of choice for this ecosystem. As soon as each league has made the decision to open to institutional capital, we’ve been right there with owners who want to partner with us, with the right architecture and the right team to get through that process.

It’s not easy for other firms to do what we do because of conflicts that other (money) managers have because of their other investment activities.

terparties with 10- to 15-year contracts, annual escalators. One of the things that a lot of investors don’t understand is in most industries, the competitive dynamics of capitalism make it actually really hard with confidence to know that any one company is going to be relevant, let alone exist over a 10-to-20-year time frame. Obsolescence risk is almost unheard of in this industry. In North America you can’t name many U.S. companies that have been around for over 100 years. In Japan, there are several companies that have been around for hundreds of years.

But in sports … the New York Yankees have compounded their equity over the last 119 years, at almost 10%, when U.S. equity markets are about 5.5% and inflation is 3%. That durability and resiliency is really unusual. How exactly the leagues in the local market operator monetize those brands and that content changes over long time frames. But that content is very important to its customer. So important, that they’re called fanatics. And your cost to acquire a customer is almost zero.

Q | How does the cost of capital come into play?

Edmundson

CONTINUED FROM PAGE 3

portfolio’s return?

“We want to create a portfolio that gets us to our return targets while incurring the least possible risk,” Edmundson said. “That’s ultimately our job here at Nevada PERS.”

Nevada PERS blew past its return target of 7.25% — its long-term assumed rate of return — earning a net return of 11.9% for the current fiscal year end June 30. The pension fund has a 76.2% funding ratio.

shift to a lower-risk portfolio,” Edmundson said.

Edmundson acknowledged the caveat that interest rates could potentially nix his hoped-for plan.    “The interest-rate environment will ultimately determine how much risk we have to have in the portfolio, and that remains unknown,” he said.

Q | What would a conflict be?

A | If your firm owns a player agency or sports gambling business, you can’t own equity in a club. Many firms that compete with us do not know this. If you’ve lent money to a team in the league, you can’t own equity in a different team because integrity of the game is important. If anyone in your senior leadership team has a personal ownership stake in a team, it’s very hard for your firm to get approved to invest in another team in the same league.

Q | Can you estimate what some of the recent valuation multiples have been for sports teams? Is it an advertising revenue multiple or streaming rights?

A | There are many public transactions where the valuation and approximate revenue multiples are known. To actually understand the valuation framework of North American sports you should disaggregate the two assets — the royalty league, IP business — and then the local live entertainment business, because you’re actually getting two different things. If you value the local live entertainment business similar to other live entertainment businesses, you get one number. If you value this really unique, global intellectual property asset, in a similar way — there are publicly traded leagues, like, Formula One, which trade publicly.

What people don’t have is enough data and transparency to disaggregate those things. We have a tremendous data advantage in this space. We have a huge data science business, we provide all kinds of data services to this ecosystem, we collect all kinds of really unique data, and on top of that, we have invested a tremendous amount in our own proprietary machinery to understand the ecosystem and the operators in a very mathematical way.

For certain leagues, the league business is just a media stream, right? But if your media partners are Amazon, Netflix, Disney and Warner Brothers, those are interesting coun-

A | Leverage drives the cost of capital and it drives the movement of this capital from asset class to asset class. Over the last 40 years, that institutional wave of capital and liquidity, if it’s even considered this industry, it’s hit a regulatory loan bounce back.

Because of the resiliency, the long-term nature of the contracts, and the brand connectivity to the consumer, the sports business fundamentals are also not correlated with most industries. They’re sort of anti-cyclical. It is low or no correlation to other asset classes.

It’s negatively correlated with some things, it is weakly correlated with others, but in the aggregate, it reduces your overall risk and enhances your return as part of a diversified private markets portfolio. There are not many things that do that.

Q | Did you play any sports? What was the personal interest in sports?

A | If you grow up in Alaska, you better play hockey. There’s nothing else to do.

And my wife was an athlete. My kids were athletes. I think sport is a beautiful thing because it teaches you how to lose, how to win the right way, how to be a good teammate, how to be coachable, how to be a leader, how to be the last person to make the team, and to be grateful that you were there, right?

So, I’ve always loved sport because of all the lessons that it taught me and the mentors that I had and the friends that I still have. I just wasn’t a fanatic of a brand. I do have a favorite team, which is kind of funny.

Q | Which team is that?

A | I don’t want to say!  Every once in a while, I would get to go with my father to visit his family, and I knew that the men I looked up to in my life, if they were going to communicate with each other constructively around anything, it was that team. They would sit around the fire and talk about that team. If I wanted to be part of that conversation when I was 9 or 10, I had to know that team.

But, that’s the power of this industry... So it’s a really, really crazy industry. It is tribal. And that’s a beautiful word.  n

The $64.1 billion pension fund topped the one-year return of some of the largest funds in the country, including the $519.9 billion California Public Employees’ Retirement System and the $338 billion California State Teachers Retirement System, which earned 9.3% and 8.4%, respectively, according to Pensions & Investments'' tracking of public pension funds. Nevada had the eighthhighest return out of 60 plans with more than $1 billion in assets as of Sept. 11. Of that same universe, it also ranked in the top 10 for three-, five- and 10-year returns.

High valuations

While Nevada PERS’ investment performance was driven primarily by a robust stock market, Edmundson is nonetheless jittery about stocks, saying that with valuations at near historic highs, “a period of modest or even challenged returns would not be surprising.

Still, Edmundson is betting that the abnormally — and once seemingly unending — low interest-rate environment prior to the pandemic will not return. While he expects the short-duration or federal funds rate to come down, he sees 10-year Treasuries “settling out” in the range of 3.5% to 5%.

“I think that's a rational place for 10-year Treasuries to be,” Edmundson said. “If the Fed achieves its long-term inflation target of say 2% to 2.5%, then 10-year Treasuries ranging between 3.5% and 4.5% or 5% would be a rational outcome, and that's where we're operating as a long-term expectation.”

Indexing saves $250 million

Edmundson likes looking out and planning over long-term horizons, saying the approach has been a key

‘It wouldn’t be surprising to expect modest returns out of equities or maybe even underwhelming returns out of equities over the near term.’

“It wouldn’t be surprising to expect modest returns out of equities or maybe even underwhelming returns out of equities over the near term,” he said, referring to the next three to five years.

NEVADA PERS’ STEVE EDMUNDSON

factor in the growth and investment performance of the pension fund, which had $27.2 billion in assets when he became CIO in 2012.

To Edmundson’s way of thinking, U.S. government bonds help offset the equity risk. U.S. Treasuries, unlike corporate bonds, don’t have any default risk and they’re the least correlated asset relative to owning stock.

“They end up being the best diversifier,” he said.

In addition to the 12% allocation to short-duration U.S. Treasuries, Nevada PERS also has 28% in longer-term U.S. Treasury bonds, bringing the total allocation to U.S. Treasury securities to 40%. It has about 12% alloacted to private markets.

The conservative asset allocation — the most risk-averse in 20 years — was put in place for the long term.

“Ideally this will be a longer-term

Duckett

CONTINUED FROM PAGE 2

to make strides in a bipartisan way,” said Duckett. “Everyone understands the burden and the stress of not being prepared, and many of us are feeling squeezed.

“One of the things we talk about at TIAA to frame this narrative is a Retirement Bill of Rights, and really quite simply what we say is that every American deserved the dignity of having a secure retirement.”

Early in her keynote, Duckett addressed the challenges of being a

He also likes to keep fees low and investment structures simple.

Nevada PERS uses only passive investments across all publicly traded asset classes, a practice that Edmundson estimates saves the pension fund roughly $250 million in total fund fees annually.

Edmundson has nothing against active management but sees passive management as the most effective tool for Nevada PERS to use.

“We spend all of our time focused on asset allocation, and indexing is simply the best tool,” he said. “It’s the most efficient tool for us to implement the market exposures that we want to have in the portfolio. I don’t believe it’s the only way.”

woman of color in the institutional investing industry.

“When I think about the struggle, when I think about the perseverance, when I think about grit, when I think about all that I am, I can’t help but think about it through the prism of the strength of women, the prism of the strength of Black women and the prism of families doing their best,” she said.

“For me as a leader, I always understand who’s not in the room,” she said. “I always ask what do you have to say at any meeting. If you’re on a box, on a Zoom, I have to hear your voice. It comes from a place of understanding what it feels like to be the ‘only.’”

Buck Ennis

“Public markets, particularly U.S. equities, were far and away the standout performer,” said Thomas Toth, managing director at Wilshire Advisors. “For a relatively diversified portfolio it was up well north of 20%. Other areas of the portfolios lagged meaningfully, even though they were also up quite well.”

For the year ended June 30, the Russell 3000 index returned 23.1%, above even its impressive return of 19% for the year ended June 30, 2023.

Toth said other asset classes also performed well, often above 10%, and those included international equity and high-yield fixed income.  For the year ended June 30, the MSCI EAFE returned 11.5% and the Bloomberg U.S. Corporate High Yield Index returned 10.4%

Private equity and real estate indexes lag by one quarter. For the year ended March 31, the Cambridge Associates US Private Equity index returned 8.3%, and the NCREIF Fund Index – Open-end Diversified Core Equity returned -12%.

Private equity, which for many public pension funds in the prior fiscal year experienced negative returns as a result of the drawdowns from fiscal year 2022, in general did perform positively in the low single digits, said Toth.

Because of the dominance of the public markets, however, Toth said smaller pension funds in general performed better this past fiscal year.

“Smaller plans tend to be a bit more middle-of-the-fairway in terms of a very strong focus on public markets (that) did tend to outperform the larger plans, which have more sophisticated, complicated asset allocations incorporating private assets and could be incorporated portfolio construction techniques like leverage in the portfolio,” he said.

Those “additional nuances” have created a drag on the portfolios of larger pension funds, Toth said.

Georgia on top

Two larger pension funds that are outliers with nearly all their assets in the public markets are the $109.5 billion Georgia Teachers’ Retirement

Social Security

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program and expand benefits by asking the wealthiest Americans to pay their fair share.”

Notably, that platform was written before President Joe Biden dropped out of the race, and Harris has yet to reveal any specifics on how she would bolster the program.

When Harris was a senator, she co-sponsored 2019 legislation led by Sen. Bernie Sanders, I-Vt., that would have extended Social Security’s payroll tax to include all earnings above $250,000.

As of 2024, Social Security’s maximum taxable earnings are $168,600, so individuals do not get taxed on earnings above that amount.

In 2023, Rep. John Larson, D-Conn., introduced a bill known as the Social Security 2100 Act, which would provide a 2% increase in benefits across the board and tax all earnings above $400,000. That bill has received support from more

System and $17.9 billion Georgia Employees’ Retirement System, both based in Atlanta. The two pension funds posted the highest recorded returns for the period at 14.5% and 14.1%, respectively.

Jim Potvin, executive director of the Georgia Employees’ Retirement System, said in an interview it’s “all about the allocation.”

“Our (state) statutes are somewhat restrictive in terms of what we can invest,” Potvin said.  “It starts with a maximum 75% exposure to equities and then to a max to alternatives — which we’ve gone into private equity — of 5%. It’s pretty much 75% stocks, 25% bonds and then 3% or 4% of private equity and that’s the way it’s been for the last couple of decades.”

Potvin added that ERS and TRS use the same investment managers and have similar asset allocations, which accounts for the closeness of the two pension funds’ investment returns.

As of June 30, TRS and ERS had actual allocations of only 0.7% and 3.1%, respectively, to alternatives.

Posting the third-highest return at a net 14% was the $15.1 billion Louisiana State Employees’ Retirement System, Baton Rouge. Unlike the Georgia pension funds, LASERS has a significant allocation to private markets totaling 21.7% as of June 30, although that is considerably lower than the allocation for the largest public pension funds.

cludes a mix of gross and net returns), and the alternatives asset class returned a net 6.2%.

The pension fund had posted the second-highest return in the P&I universe for the fiscal year ended June 30, 2023, at 11.7%.

The fourth-highest return for the most recent fiscal year was posted by the $12.2 billion Oklahoma Public Employees’ Retirement System, Oklahoma City, which returned a net 12.7%. The prior year, OPERS had

As of June 30, OPERS' actual allocation was 41.1% U.S. equity, 30.1% U.S. fixed income, 28.4% international equity, 0.3% cash and 0.1% real estate.

U.S. equity regret

While every public pension fund posted positive returns for the fiscal year ended June 30, some inevitably regretted a lack of exposure to domestic equities during a period in which stocks dominated so strongly.

EQUITY REGRET: Callan’s Jay Kloepfer

the second-highest return with a net 10.9%.

Bobby Beale, chief investment officer, said in an Aug. 27 news release the outperformance “underscores our commitment to strategic asset allocation and prudent risk management. The plan benefited from favorable equity markets, as well as our allocation to global multisector/ opportunistic investments, which makes up the majority of our fixed-income portfolio.” Beale later referred questions to the news release.

LASERS’ total equity portfolio returned a gross 18.9% for the fiscal year ended June 30, while global multisector/opportunistic investments returned 14.3% (which in-

than 180 Democrats in the House, though it’s unclear what Harris thinks of it. Larson told Pensions & Investments in 2023 that he based the tax increases off of President Joe Biden’s 2020 campaign promise to not institute new taxes for those making less than $400,000.

Candidates spar

Both candidates have vowed to protect the program, yet they continue to spar over Social Security.

In his keynote speech at the Republican National Convention, Trump said, “I’m going to protect Social Security and Medicare. Democrats are going to destroy Social Security and Medicare.”

This prompted a rebuttal from the Democratic presidential campaign team on X, formerly known as Twitter, writing, “FACT CHECK: Trump introduced a budget to cut Social Security and Medicare every single year he was in office. The reason it didn’t happen was because Democrats stopped him.”

According to PolitiFact, a nonpartisan fact-checking website, Trump’s

Joe Fox, OPERS’ executive director, said while the pension fund benefited from an overweight position to U.S. and non-U.S. equity markets, fixed income also contributed positively to the pension fund’s overall results.

“The positive total return to fixed-income markets for the fiscal year were a welcome development, as the Federal Reserve took its foot off the brake during the fiscal year,” Fox said.  “That asset class had been an anchor dragging overall fund performance for three out of the last four fiscal years.”

“Overall, there were few areas of the financial markets that did not produce positive total returns, and active risk-taking in certain pockets of the market was particularly well-rewarded for the period,” he said.

proposed budget for 2021, like previous years, called for cutting two programs the Social Security Administration oversees: Social Security Disability Insurance and Supplemental Security Income.

The SSDI program provides payments to those with disabilities limiting their ability to work, and the SSI program provides payments to lower-income Americans who have disabilities or are 65 and older. The programs are technically smaller and separate from the agency’s retirement benefit program, and Congress never enacted those cuts.

turned at or above 7%, which is the median for public pension plan assumed rates of return, for the 10 years ended June 30.

“For our clients, how are they acting upon this?” asked Jay Kloepfer, executive vice president and director of Callan’s capital markets research group.

“Interestingly they are eager and keen to be invested in the U.S. equity market.”

However, he said that many board members are not financial experts, primarily serving by virtue of government positions or elected by plan participants.

While many board members are required to have some financial background, Kloepfer said not all do and can respond to market movements emotionally. They're human, he said.

The result is some board members have looked upon their investments in asset classes like emerging markets equities and international small-cap equities as missed opportunities.

“We try so hard to keep our clients invested in the non-U.S. markets when they’re 40% of the global market," Kloepfer said, “and the premise — which has not been fulfilled — is emerging markets is going to be a place where growth happens, and that growth will translate to stock-market share. But as a U.S. investor, you have been penalized for that belief for five, 10, 15 years.”

For the five and 10 years ended June 30, the Russell 3000 index returned an annualized 14.1% and 11.9%, respectively, while the MSCI EAFE index has returned an annualized 6.5% and 4.3%, respectively.

Long-term returns

Among the 46 U.S. public pension funds for which P&I has 10-year annualized returns, only 20 plans re-

The two top public pension funds for the 10-year period were the $64.1 billion Nevada Public Employees’ Retirement System, Carson City, and the $95.3 billion Ohio State Teachers’ Retirement System, Columbus, which posted annualized net returns of 8.4% and 8.1%, respectively, for the period. Notably, the latter system is currently embroiled in controversy due to a group of reform trustees claiming their investment returns are poor and the system should move to all or nearly all index funds, citing the success of the Nevada system, which is more than 80% passive.

For the longer term, larger pension funds with higher allocations to private markets performed better against the median than they did for the fiscal year ended June 30.

Those whose most recent fiscal-year returns fell below the median return of 9.9% in the P&I universe but finished well above the median return of 6.8% for the 10 years ended June 30 include the $344.9 billion California State Teachers’ Retirement System, West Sacramento (which returned 8.4% for one year and 7.7% for 10 years) and the $94.5 billion Oregon Public Employees Retirement System (6% for one year and 7.3% for 10 years).

For the five years ended June 30, 39 U.S. public pension plans posted annualized returns at or above 7% of the 52 public pension plans for which P&I had current data.

Cutting emerging markets

In the past year, at least a half dozen public pension funds have reduced or eliminated their emerging markets equity exposure due sometimes to geopolitical concerns but also because of the strength of U.S. equities.

In June, the Pennsylvania State Employees’ Retirement System, Harrisburg, cut the target to emerging markets equities for its $36.4 billion defined benefit plan to 2% from 5% and raised the target to domestic equities to 37% from 34%.

PennSERS spokeswoman Pamela Hile said at the time that "emerging markets' long-term underperformance relative to U.S. equity was one factor in the decision and part of a

At the Democratic National Convention, Harris also vowed to protect Social Security, specifically calling out Trump’s previous actions.

“We are not going back to when

Ultimately, Munnell said that both candidates still need to present a concrete plan on how they plan to bring more revenue into Social Security’s trust funds.

“These proclamations that they’re not going to cut benefits (are) heartening, but it really will require some money,” she said. “Both teams have to come up with a plan to put some money (into the program).”

Trump’s plan to stop taxing

Though not included in the 2024 Republican platform, Trump recently proposed eliminating the taxation of Social Security benefits.

“SENIORS SHOULD NOT PAY TAX ON SOCIAL SECURITY!” Trump wrote in a July 31 Truth Social post. Munnell and other experts said

Donald Trump tried to cut Social Security and Medicare,” Harris said in her keynote address at the DNC.

DETAILS NEEDED: Center for Retirement Research at Boston College’s Alicia Munnell

Public pension fund returns

long-term strategic change."

Another issue is the level to which the U.S. dominates in technology, with the Magnificent stocks including NVIDIA and Apple.

“You have companies that actually make things,” he said. “They’re not ephemeral. NVIDIA is a real company that makes things, although I would hesitate that NVIDIA is more valuable than Apple.”

that implementing such a change could worsen the Social Security program’s financial situation.

By exempting Social Security benefits from taxes, “you’re depriving the trust funds of that additional revenue and thereby accelerating how fast those trust funds will go insolvent,” said Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation, a nonpartisan tax policy nonprofit. Doing so would accelerate the exhaustion of Social Security’s com-

Kloepfer said the skyrocketing stock prices of technology companies represent existing companies and it isn’t like the dot-com recession in which people were buying on a promise of future production, and trying to convince boards that they

bined trust fund reserves to 2033 from its current projection of 2035, according to Watson. An analysis from the Committee for a Responsible Federal Budget found that the program’s trust fund for retirees and their families would also face a sooner depletion date of 2032, rather than 2033.

The way that Americans are taxed on their Social Security benefits varies by income; those earning less than $25,000 individually, or $32,000 jointly, pay no tax on their benefits.

should continue to invest in non-U.S. equities has led to “frustrating conversations.”

Margaret Belmondo, partner and public fund team leader at investment consultant NEPC, echoed that it has been frustrating for the firm to see such a narrow market outperforming when they want to create a

Taxes are then adjusted based on different income thresholds; those earning between $25,000 and $34,000 individually, or between $32,000 and $44,000 jointly, are taxed on up to 50% of their benefits, while those earning above those levels are taxed on up to 85% of benefits, Watson explained.

“Folks are getting a break there,” Watson said. “And to go further, of course, would treat Social Security benefits quite a bit differently and preferentially over other forms of

diversified all-weather portfolio, but signs are the market is broadening again since the beginning of fiscal year 2025.

“We’re seeing a broader market in value names, and we’re also seeing it in small caps, which is great,” Belmondo said. “It’s so hard because our clients are diversified across all asset

retirement savings, while also being a challenge from an insolvency perspective.”

As the Committee for a Responsible Federal Budget found, implementing Trump’s proposal would actually result in a larger benefit cut at the time of insolvency, increasing to a 25% cut, up from the projected 21%, Watson pointed out.

Currently, the income threshold for which earners are not taxed on their Social Security benefits — $25,000 individually or $32,000 joint-

classes … so we want to create an all-weather portfolios. It does get frustrating when you just see this narrow market outperforming, but we do see ourselves coming out of it.”

“I also think with the Fed going to begin to cut rates in September, that should be a tailwind. But there’s still a lot of uncertainty,” she said.

ly —”is not indexed for inflation and hasn’t changed since 1993, so a higher and higher portion of folks are seeing some tax on their benefits,” Watson said.

Therefore, he suggested indexing the income thresholds for inflation to avoid the “creep” of more and more benefits being taxed, and Munnell suggested the same.

“My view is that virtually everything in the policy world should be indexed for inflation,” Munnell wrote in an August blog post.